City of Chicago

Aldermanic Briefing - Securitization Structure September 20, 2017

City of Chicago * Mayor Rahm Emanuel

What Is a Securitization? Why Is it Beneficial? • What does the new legislation provide?

• PA 100-0023 allows home rule municipalities to irrevocably assign revenues received fromthe State to special-purpose corporations created by those municipalities.

• What benefits do special-purpose corporations provide?

• The corporation would be considered bankruptcy-remote, and all debt issued by it would have a statutory lien attached to it. This means that even in the unlikely event of a municipal bankruptcy, bondholders would still be paid.

• Ratings agencies rate bonds issued by special-purpose corporations highly because they are more legally secure than a normal bond.

• As a result of these highcredit ratings, bondholders require much lower rates for special-purpose corporationbonds than a typical municipal bond that the City issues. This significantly lowers borrowing costs.

• Howwill it work for the City?

• The City would create a corporation as described above.

• The City would assign certain revenues to the corporation, which would issue debt using these revenues as its repayment source. The City would receive the proceeds of the corporation's bonds in exchange for the assignment of the City revenues to the corporation. This is how the revenues wouldbecome "securitized".

• Revenues after the payment ofdebt service flow to the City each year.

• The City can refinance existing expensive GO debt with significantlycheaper corporation debt.

• This refinancing will save the City millions ofdollars per year, help alleviate the City's GO debt burden, and in the long run may result in ratings upgrades for the City's GO credi t.

City of Chicago * Mayor Rahm Emanuel 2

Sales Tax Securitization in the News

State budget deal contains a junk­

free sweetener for Chicago

CRA\H'S ~ I.l ' .. .;. 1: 0 ... " ·· · ' .... Fitch: Illinois Legislation Gives

JU\), 11, 201'7 Chicago New Financing Tool

Fifch " ""1 _ JUly 19, 2017

Fitch agrees: Chicago hit mini­jackpot in new state budget

CRAIN'S ~"IC " ~O , ,,, , ,.r. ~ ':.

July 19, 2017

City of Chicago * Mayor Rahm Emanuel 3

Creating a Securitization for the City of Chicago • With City Council approval , the City will form a corporation for the sole purpose of issuing bonds.

• The corporation must be an entity legally independent of the City.

• The corporation will issue debt; the debt will be repaid by revenues assigned by the City to the corporation.

• All revenues not used to pay principal and interest each year will flow to the City.

• Bonds issued by the corporation still require City Council approval:

Current Bond Issuance Process

The Office of Mayor's Office the CFO Recommends Mayor's Office Submits Approved ..... Recommends

~ ,. ~ ;'~ Capital Capital Bond

;.w,:;o;.Financing Financing Issuance I!!'~!!l'Requirements Requirements

Corporation Bond Issuance Process

The The Office of Corporation

the CFO Mayor's Office Receives Submits Recommends Bond

~ ~ ~ ~ -7Bond Proceeds

Financing Capital

~

Issuance and Sends :J.lI.!.I,'J.1J.L!. Proceeds

to the City Requirements

City of Chicago * Mayor Rahm Emanuel 4

Creating a Special-Purpose Corporation for the City of Chicago

• After the corporation's articles of incorporation are filed, the new board must meet to adopt the corporation's bylaws.

• The corporation will be governed by a five member Board of Directors:

1. The City Chief Financial Officer (Chair)

2. The City Budget Director

3. The City Comptroller

4. The Chairman of the Committee on Finance of the City Councilor another Finance Committee member as selected by the Chairman and approved by the Mayor.

5. The Chairman of the Committee on the Budget & Government Operations of the City Councilor another Budget Committee member as selected by the Chairman and approved by the Mayor.

• The corporation will:

• Conduct open board meetings in accordance with the Illinois Open Meetings Act,

• Comply with the Freedom of Information Act,

• Have its bonds included in the Quarterly Bond Report submitted to the City Council Committee on Finance,

• Be subject to oversight of the Office of the Inspector General,

• And be included in the City's yearly audited financial statements.

City of Chicago * Mayor Rahm Emanuel 5

Sales Tax Securitization Flow of Funds • The proposed plan of finance contemplates using sales tax

revenues. Sales tax revenues received from the State will be assigned to the corporation.

• The corporation will issue debt on the City's behalf at significantly lower cost, and refund existing City general obligation and sales tax bonds for savings.

• Sales tax revenues will flow first to the corporation, which will use these sales tax revenues to pay debt service on any debt secured by sales tax revenues that it issues.

• All sales tax revenues not needed by the corporation to pay debt service will flow to the City's Corporate Fund.

• The City currently has outstanding debt paid for by sales tax revenues.

• For the existing sales tax bonds, the City cannot use its sales tax revenues for other things until it pays its debt service.

• Once the debt is paid by the City, then it can use the sales tax money for any purpose. It will be the same for the corporation's bonds; once annual debt service is covered, excess revenues can be used by the City for any purpose.

Flow of Funds

Sales Taxes Collected By the State

Home Rule Sales Taxes

Local Share Sales Taxes

Transferred from the Illinois Department of Revenue directly to the corporation

Corporation uses sales tax revenues to pay debt service on debt it issues on the City's behalf

1Excess revenues not needed for debt service are transferred to the City

The City may use these revenues for other purposes

City of Chicago *Mayor Rahm Emanuel 6

Breakdown of 2016 Sales Tax Revenues

Home Rule Sales Tax Revenue Retailers and Service Occupation

Titled Use

Nontitled Use

Local Share Sales Tax Revenue Retailers and Service Occupation

Use

TOTAL

%ofTotal

$257.1

40.4

54.2

$337.9

$283.6

79.8

$363.4

$715.2

100.0%

$257 .1

40.4

-

$297.5

$283.6

79.8

$363.4

$660.9

92.4%

I

• The City received $715.2 million in sales tax revenues in 2016.

• $39.4 million for 2016 debt service

• $675.8 million for 2016 corporate fund

$ - • $660 .9 million (92.4% of the total) were collected by the State and-distributed to the City.

54.2 • The City will assign all of these

$54.2 sales taxes collected by the State to the corporation.

• Nontitled use taxes are collected $ - directly by the City (7.6% of the total).

- • These taxes will not be assigned to the corporation.

$ ­• They will continue to flow

directly to the City for its own use.$54.2

7.6%

') This is what the City is selling to the Corporation

Cityof Chicago * Mayor Rahm Emanuel 7

Comparable Special Tax Bond Issuers: Subsequent GO Ratings

• Other peer cities have seen their general obligation ratings increase significantly after creating similar tax securitization corporations.

Rating History New York City

New York City S&P Fitch • In 1998, New York City created the New York City Transitional Finance

GO Rating at Creation BBB+ A-Authority (NYCTFA) using income taxes and sales taxes received from the State. Number of Upgrades 5 4

• Since NYCTFA's creation, New York City's rating has risen to AA, 4-6 GO Rating Current AA AA notches higher than Chicago.

Philadelphia S&P FitchPhiladeillil@.

• In 1992, Philadelphia created the Pennsylvania Intergovernmental GO Rating at Creation BBB- BB Cooperation Authority (PICA) using a 1.5% wage tax on city residents. Number of Upgrades 5 5

• Since creating PICA, Philadelphia's Fitch rating has risen from BB GO Rating Current A+ A­

(junk) to A- .

Washington, D.C. Washington , D.C. S&P Fitch

• In 2008, Washington, D.C . created the Income Tax Secure Revenue GO Rating at Creation A+ A+ Bonds using income taxes levied by the District.

Number of Upgrades 2 2 • D.C. is now rated AA.

GO Rating Current AA AA

City of Chicago * Mayor Rahm Emanuel 8

Proposed Plan of Finance • The CFO requests authority to issue bonds up to $3.0 billion over four total transactions:

Fall 2017 transaction Future transactions Total

$1 ,500M 1,500M

$3,OOOM

• Proceeds will be used to:

• Retire the existing sales tax bonds (approximately $700 million)

• To refund a portion of the City's outstanding GO bonds ($2.3 billion)

• Corporation debt is likely to be structured to produce 30-year level debt service, and will result in PV GO savings of 4%, approximately $45 million.

• The City expects the Corporation to receive substantially higher ratings than the City's existing GO and sales tax credits) which will allow the City to achieve significant savings when the corporation issues debt.

Current Credit Ratings

Rating Agency

S&P BBB+ AA Rate 6.24% 5.40%

Fitch BBB- BBB- Spreads $3.50 $2.66

City ofChicago * Mayor Rahm Emanuel 9