Chicago Wins Lowest Cost Since ’09 Making Cubs Pay: Muni Credit

Chicago Mayor Rahm Emanuel’s refusal to sell bonds for a $500 million renovation of Wrigley Field is poised to help extend a debt rally that has pushed the city’s relative borrowing costs to a four-year low.

The Chicago Cubs Major League Baseball franchise, which hasn’t won a championship since 1908, would finance the upgrades to the 99-year-old ballpark based on a plan the team and city released last week. Cubs Chairman Tom Ricketts, who co-founded bond underwriter Incapital LLC and tried to get Chicago and Illinois to help pay for construction, said the team will win the World Series if the proposal is approved.

Emanuel’s decision to withhold public money shows he’s focusing on the strains of the city’s pension costs, said Laurence Msall, president of the Civic Federation, a Chicago nonprofit group specializing in government finances. The Democratic mayor has warned retirement obligations may consume about 20 percent of the budget within four years. The stadium move may also extend gains that have shrunk the yield penalty on some city obligations to the lowest since 2009.

“Chicago has to worry about how to fund essential parts of city government -- this would have been a distraction,” said Shawn O’Leary, senior research analyst in Chicago for Nuveen Asset Management, which oversees about $95 billion of munis. “It would have been an additional strain on their finances.”

‘Precedential’ Deal

The third-most-populous U.S. city’s resistance to stadium debt differs from municipalities including Miami. Voters there will decide via referendum next month whether to support part of a $350 million improvement to Sun Life Stadium for the National Football League’s Dolphins.

Chicago’s deal has the potential to be “precedential” because it wouldn’t be issuing bonds to support a privately owned sports team, said Donald Haider, a former city finance director. He was involved in negotiations with the Chicago Bears that led to a revenue bond sale for sky boxes at Soldier Field in 1979, backed by parking receipts.

Wrigley renovation plans provoked resistance from then-Chicago Mayor Richard M. Daley and Governor Pat Quinn in 2010 because the Ricketts family was pushing for the state to sell $300 million of tax-exempt bonds to finance the deal. Emanuel, who took office in May 2011, repeatedly said he didn’t want taxpayer money used.

Rating Threat

Tom Ricketts is a son of TD Ameritrade Holding Corp. founder Joe Ricketts. The family bought the team in 2009 from the Tribune Co.

Emanuel, 53, a former investment banker, U.S. congressman and President Barack Obama’s ex-chief of staff, faces pressure from ratings companies as the city recovers from the 18-month recession that ended almost four years ago. Moody’s Investors Service put Chicago’s Aa3 bond rating on review for downgrade last week, citing “large adjusted net pension liabilities.” The grade is the company’s fourth-highest mark.

The Emanuel administration has warned that retirement contributions will cost about $1.2 billion within four years if the state legislature doesn’t restructure the system, up from $476 million last year.

Deficit Dilemma

Chicago faced a deficit of $298 million before the approval in November of the 2013 spending plan, which would eliminate the projected gap without raising fees or taxes. Chicago Public Schools said last month it intends to close 54 schools as part of a plan to eliminate a $1 billion shortfall.

With municipal interest rates below their five-decade average, investors looking to pad returns have sought Chicago debt for their relatively higher yields.

Buyers this month demanded as little as 0.24 percentage point of additional yield to own tax-exempt Chicago general-obligation bonds maturing in January 2032 rather than benchmark munis due the same year, data compiled by Bloomberg show. That’s the smallest spread since 2009. The bonds also traded this year at the lowest yield since their 2007 issuance.

The ballpark deal isn’t complete yet, and any agreement may yet add to the city’s burden, said Haider, a professor of management at Northwestern University’s Kellogg School of Management, which is based in Evanston, Illinois.

Landmark Status

After the proposed renovation agreement was announced April 15, Ricketts said he wants a landmark status tax break and doesn’t want to pay Chicago for expanding the venue onto public sidewalks and streets. These concessions, if adopted by the city council, would indirectly put part of the cost of renovations on the backs of taxpayers.

The most important point was “having the flexibility to run Wrigley Field and the Cubs like a business,” said Dennis Culloton, a spokesman for the Ricketts family. “This comes pretty close to achieving that.”

“Wrigley Field is a cherished institution in Chicago and the Wrigleyville community, but it is not the taxpayers’ responsibility to rebuild this private venue,” Sarah Hamilton, Emanuel’s communications director, said in an e-mail. “The framework that we have reached allows the Cubs to restore the Friendly Confines and pursue their economic goals.”

Chicago and Illinois have spent taxpayer dollars to build or update stadiums for the Chicago White Sox and the Chicago Bears, and this deal charts a new course because it recognizes that neither the city nor the state can afford to commit funds for sports teams, Msall said.

Taxpayer Hook

“This Wrigley Field renovation breaks from the precedent of having the government on the hook for financing,” Msall said.

States and cities are poised to sell about $7.8 billion of bonds this week, the least since the period through April 5, Bloomberg data show. They issued about $20 billion in the past two weeks, the most this year.

Even with the supply wave, the yield on benchmark 10-year munis has fallen about 0.2 percentage point since the start of April. Municipal debt is set this month for its biggest return since November, in its fifth-straight April rebound.

At 1.75 percent, yields on AAA munis due in 2023 are about 104 percent of the interest rate on similar-maturity Treasuries, data compiled by Bloomberg show.

The ratio, a gauge of relative value, has been above 100 percent for seven straight trading days. The higher the percentage, the cheaper local debt is compared with federal securities.

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