Chicago Water District Sells Bonds as Pensions Cost It AAA Gradeby
Sale of $427 million is for refinancing debt, projects
Despite cut, district among highest-rated Chicago borrowers
Chicago’s pension holes are so deep they’re even tainting the water.
The Metropolitan Water Reclamation District of Greater Chicago sold $427 million of bonds on Monday, paying a top yield of 2.86 percent on securities due in 2045, or 0.42 percentage point more than top-rated securities, according to data compiled by Bloomberg.
The sale was the district’s first since the loss of its AAA ranking from S&P Global Ratings last month because of the financial squeeze underfunded retirement plans are putting on governments in northern Illinois. The district, an independent agency that now carries S&P’s second-highest rating, manages wastewater treatment for Chicago and most of Cook County, both of which owe billions to their workers’ pensions.
“No borrower in the state can escape the pension talk,” Adam Buchanan, senior vice president of sales and trading at Ziegler, a broker-dealer in Chicago. Even so, he said, “it’s obviously the strongest credit in Chicago because of the revenue stream that it leverages.”
Chicago’s more than $20 billion of unfunded liabilities led Moody’s Investors Service to cut its rating to junk in May 2015, causing investors to demand higher yields as the city sold more than $3 billion of bonds. While Chicago has since enacted a record property-tax increase for police and firefighters pensions, it’s still not paying enough to keep its debt to those funds from growing, nor has it put in place a plan to cut the cost of its other pensions after previous changes were thrown out in court.
The wastewater district isn’t under as great a strain. It enacted an overhaul of its retirement plan in 2013 that increased employee and employer contributions. While the plan last year had only enough to cover about 55 percent of the benefits it has promised, S&P said that’s offset by “very strong reserves” and a customer base scattered throughout a “deep and diverse” metro-area economy.
That was reflected in bond prices. Wastewater debt due in 2036 sold for a yield of 2.71 percent Monday, about half a percentage point over benchmark rates. By comparison, Chicago general obligations due in 2038 traded Monday for 5.08 percent.
“The district is actively addressing its pension liability by providing increased funding to reduce the liability,” Mary Ann Boyle, the district’s treasurer, said during an investor presentation. “We have a very strong and stable tax base with a well-diversified local economy. We maintain strong cash reserves that provide liquidity and flexibility in our operations.”
The revenue the district receives from residents makes up only a small share of their overall taxes, said Executive Director David St. Pierre, and its rates are only about half the Midwest average.
The offering was the water district’s first since December 2014, according to Bloomberg data. The district’s rating from S&P is six steps higher than Chicago’s general-obligation debt. Fitch Rating ranks the district AAA.
In addition to refinancing higher-interest debt, the deal raised funds for work on flood-control and other projects. The offering included $4 million of taxable bonds.
The district is charged with managing storm water, waste-water treatment and flood control. It serves the city of Chicago and 128 suburban communities around Cook County. It operates seven water reclamation plants and 22 pumping stations. The district gets its revenue mostly from property taxes and user charges, according to bond documents.
“It’s a strong name,” said Dennis Derby, an analyst and portfolio manager at Wells Fargo Asset Management, which holds about $39 billion in assets, including the district’s debt. “It’s an essential service. If you look at the amount of liquidity that the board has, it paints a fairly strong picture for them.”