STATEMENT FROM CHIEF FINANCIAL OFFICER CAROLE BROWN ON 2019 BUDGET PROPOSAL

TO THE CITY COUNCIL COMMITTEE ON BUDGET AND GOVERNMENT OPERATIONS

Monday, October 22, 2018

Chairman Austin, Vice Chairman Ervin, members of the Committee on Budget and Government
Operations, and members of the City Council, thank you for the opportunity to present the
financial strategies included as part of Mayor Rahm Emanuel’s proposed 2019 budget.

As the Chief Financial Officer, my primary responsibility is to direct the City’s overall financial
policy and provide day-to-day oversight of the City’s debt portfolio. My office also oversees our
public-private partnerships, which includes the Chicago Parking Meters, Millennium Park
Garages, and the Skyway. In addition, my office manages the Municipal Marketing program
comprised of the Chicago Digital Network and various advertising opportunities on city assets,
such as Divvy bike stations, street furniture, and bus shelters.

Financial Road Map

In April 2015, Mayor Emanuel outlined five actions that will be implemented as part of the City
budget each year to end unsustainable financial practices and mitigate risk to taxpayers.

The five steps include:

 Terminating swaps to end the risk associated with taxpayers
 Converting all of the City’s general obligation variable-rate debt portfolio to fixed-rate
 Continuing to increase operating budget funding for working capital and short-term
obligations
 Continuing to build the City’s long-term reserve funds in each budget and,
 Ending the practice of “scoop and toss” by 2019.

We have made measurable steps to implement each of these reforms and ended the practice of
scoop and toss a year early in 2018.

Swaps and Variable Rate Debt

Concluding in 2016, we converted the City’s entire tax-back variable rate debt portfolio to stable,
fixed rate debt, reducing taxpayer risk and helping to secure the City’s financial stability.
Additionally, we terminated $2.5 billion in corresponding swaps, ending taxpayer risk associated
with this financial practice.
Long Term Reserves

As part of it budget stabilization policy, the city adheres to the Government Finance Officers
Association (GFOA) recommendation and maintains an unrestricted fund balance in the general
fund of no less than two months of operating expenses.

Additionally, it is the City’s policy is to maintain sufficient unrestricted fund balance to mitigate
current and future risks, emergencies, or unanticipated budget shortfalls. As part of its financial
and budget practices, the City establishes and maintains three sources of the unrestricted
budgetary fund balance, referred to collectively as fund stabilization or fund balance: (i) Asset
Lease and Concession Reserves, (ii) Operating Liquidity Fund, and (iii) Unassigned Fund Balance.

Rather than raid the City’s reserve funds or sell City assets for one-time revenue, Mayor Emanuel
has added to the City’s reserves each year and established additional measures to stabilize the
City’s budget. Since 2012, the City has added over $50 million into its asset lease and concession
reserves fund.

In 2016, the City created the Operating Liquidity Fund for purposes of financial management. The
Operating Liquidity Fund is expected to function as recurring short-term funding for the City
operations that are funded from a dedicated revenue source (i.e. Chicago Public Library property
tax revenue), to mitigate against temporary shortfalls caused by timing difference in the receipt
of certain revenue. The Operating Liquidity Fund is not intended to provide one-time revenue to
the General Fund budget or provide an indefinite line of credit. The City has set aside $5 million
in 2015, 2016, 2017, and 2018 for the Operating Liquidity Fund, which is reflected in the CAFR in
the assigned fund balance. The City plans to deposit another $10 million in the Operating Liquidity
Fund in 2019.

Surplus revenues identified throughout the annual financial audit process make up the
unassigned fund balance. The City’s unassigned fund balance has increased from $33.8 million in
2013 to $155.5 million in 2017. The growth has been due in part to the improving economy,
enhancements in revenue systems, including debt collection and investment strategies, and
ongoing savings and efficiencies. Further the City does not appropriate more than one percent
of the value of the annual corporate budget from the prior year’s audited unassigned fund
balance in the current year’s budget.

Achieving Debt Service Savings

In October 2017, Mayor Emanuel and the City Council approved an ordinance to create a sales
tax revenue securitization structure for the City of Chicago, which allows the City to achieve
significant debt service savings through a higher credit rating for this specific type of debt
therefore reducing the cost to taxpayers. Through the Sales Tax Securitization Corporation or
STSC, we have completed two successful pricings totaling $1.4 billion in refunding bonds issued
at roughly 300 basis points less than the City’s most recent General Obligation Bond issuance.
Since the STSC was approved by City Council, we received a ‘AAA’ bond rating, the highest bond
rating available, from Fitch Ratings and Kroll Bond Rating Agency. The rating agencies cited the
strong legal framework, solid growth prospects, superior financial resilience, and sound
economic resource base as the rationale for the high ratings.

The STSC’s first transaction priced in December 2017. At that time, we refunded $515 million of
existing sales tax bonds and $166 million of GO bonds, attracting over 70 investors and achieving
over $46 million in net present value savings. The true interest cost for this transaction was 3.35
percent or 302 basis points less than the January 2017 GO pricing, which had a true interest cost
of 6.37 percent. In early January, despite a changing market environment, we successfully
refunded $680 million in GO debt. This transaction had a true interest cost of 3.88 percent which
is 249 basis points less than the January 2017 GO pricing. The creation of the STSC and refunding
of higher debt provided the City significant budgetary savings in 2018 and 2019. The City expects
to sell an additional $650 million of STSC bonds and refund GO debt for savings later this month.
Due to the STSC, the City is expected to realize over $700 million in budgetary savings over a five-
year period.

Pension Funding

Today, all four of the City’s pension funds are on a path to solvency through pension funding
reform achieved by Mayor Emanuel, labor leaders, and the Chicago City Council. Without these
reforms, the City’s four pension funds would have gone insolvent in 2020.

From 2015-2019, the City will budget over $3.6 million to the Police and Fire pensions and then
begin budgeting actuarially determined contributions in 2020. To support the phase-in pension
contributions, the City passed a $543 million four-year property tax increase for police and fire
pensions, funding the City’s growing contributions in 2015 through 2018. The City is meeting the
$32 million increase for Police and Fire pensions in 2019 through available operating revenue.

To fund the City’s growing contributions to the Municipal Pension Fund, the City passed a phased-
in tax on water-sewer usage in 2017 that is assessed on Chicago businesses and residents. The
City will use available operating revenue to meet the growing laborers’ employer pension
contribution. From 2017-2021, the City is budgeting more than $2.4 billion to the Municipal and
Laborers’ Pension funds and will begin budgeting the actuarily required contributions in 2022.
Capital Projects

Water & Wastewater

The City continues to fund a portion of its capital improvement projects for our water and sewer
systems and airports through bond proceeds.

In 2012, the City launched a ten-year capital improvement program to modernize and rebuild the
City’s aging water and sewer systems. Through this initiative, the Department of Water
Management (DWM) will replace a total of 880 miles of century-old water pipes, reline or rebuild
more than 750 miles of sewer lines, reline 14,000 sewer structures, and upgrade four of the
original steam-powered pumping stations. These ongoing DWM projects will ensure continued
economical and reliable delivery of water.

The water and sewer capital improvement programs are primarily funded by bond proceeds,
grants and loans, and water and sewer revenue. Any debt payments, including revenue bonds
and loans, are paid with revenue from each system’s charge for service. The City has received
funding from the Illinois Environmental Loan Funds program, which provides loans with lower
interest rates and shorter repayment schedules than long-term bonds.

In June, City Council approved the issuance of Water Revenue Project and Refunding bonds in an
aggregate principal amount not to exceed $500 million and Wastewater Transmission Revenue
Project and Refunding Bonds in an aggregate principal amount not to exceed $400 million. These
bonds are intended to be sold in 1st Quarter 2019 and will fund new money projects.

O’Hare

In spring 2018, the City and airlines signed a new Airline Use and Lease Agreement for O’Hare
that includes an $8.7 billion Terminal Area Plan (TAP). The TAP provides a new Global Terminal,
a new Global Concourse and two new satellite concourses as well as enhancements throughout
other existing terminals. The TAP will provide an additional three million square feet to outfit the
Airport with new technology and security enhancements as well as 25 percent more gate
capacity. Construction of the major elements of TAP will be completed over the next ten years.
This Council authorized $4 billion of bonds to fund initial portions of the TAP. We expect to sell
the first series of bonds to fund this groundbreaking project later this year.

Conclusion

Through the hard work of Mayor Emanuel and the City Council, Chicago is as financially sound as
it has been in decades. This budget shows the tremendous gains we’ve made to strengthen our
fiscal standing, reduce our structural deficit, confront big financial challenges. The deficit is the
smallest it has been in over a decade. The pensions are finally right-side up, rather than upside
down. The City’s credit outlook is stable and our financial future is brighter.

I would like to take a minute to recognize this Council for your work in securing Chicago’s fiscal
future and the 2019 budget will continue to build upon this effort.

Thank you and I look forward to our discussion today.