This is an archived article that was published on sltrib.com in 2016, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.

Chicago • Chicago is still paying a price for mounting pension obligations as the junk-rated city returns to the municipal bond market for the first time since a record property-tax increase.

The city is selling $500 million of general-obligation bondsto refinance existing securities and cover some debt- service bills.

The federally tax-exempt securities are being offered at a top yield of 4.93 percent, according to three people with knowledge of the issue who requested anonymity before the deal is final. That's about 2.3 percentage points higher than benchmark debt, according to Bloomberg data.

While the proceeds of the levy will shore up the police and fire fighter pensions, Chicago's $20 billion pension shortfall across its four retirement funds remain a significant challenge.

The city's bonds traded more than 4 points above benchmark securities this month as Mayor Rahm Emanuel'sadministration came under increased criticism.

"The fact that they've had those positive reforms has kept the door open in the market for them," said said Richard Ciccarone, Chicago-based chief executive of Merritt Research Services. "It's given them the time to fight another day."

Tuesday's borrowing comes as the Justice Department is investigating the Chicago Police Department and protesters are demanding Emanuel's resignation because of the handling of the release of a video showing a police officer fatally shooting a black teenager 16 times

Emanuel and local prosecutors have drawn criticism for the 13 months it took to release the video and charge the officer involved with murder.

Chicago expects the deal's yields to be below 5 percent, Carole Brown, the city's chief financial officer told aldermen on Monday at the city council's finance committee meeting.

The city last sold federally tax-exempt general-obligation bonds in July for a top yield of 5.69 percent, about 2.4 percentage points above the benchmark, according to Bloomberg data. The spread on that debt has since climbed about 70 basis points.

While Chicago will pay a penalty given its challenges, the spreads will be tighter than the July deal, said John Miller, co-head of fixed income in Chicago at Nuveen Asset Management, which oversees about $100 billion in munis. Chicago has "upside potential" longer term, Miller said.

"The property taxes do show a willingness to start addressing these issues even though it's not a cure all," Miller said. "It's a step towards fiscal improvement, and I think the market's stronger."

Nuveen is considering buying the bonds and has been adding to its Chicago general-obligation position for its high-yield funds. Low supply and strong demand in the $3.7 trillion municipal market, especially for high-yield securities outside of Puerto Rico, will benefit Chicago, Miller said.

Investors must take into account the uncertainty regarding the city's liabilities. Chicago's plan to save its pensions from insolvency and curb costs is still pending before the Illinois Supreme Court. Investors have said they expect the court to rule against Chicago. The city's lawyers have said the city's changes ensure the pensions are fully funded so it should be upheld.

The gridlock in state government isn't helping. While lawmakers passed a plan to reduce Chicago's contribution to public-safety pensions, the measure hasn't been set to Governor Bruce Rauner for his signature. Rauner, a Republican who is locked in a stalemate with the Democrat-controlled legislature, has previously criticized the bill as "kick the can down the road" legislation.

Moody's Investors Service dropped the city to Ba1 in May, and didn't rate Tuesday's deal. Standard & Poor's and Fitch Ratings both rank the bonds BBB+, three steps steps above junk.

While Chicago made has "significant progress," the city still faces challenges, according to Joseph Gankiewicz, a credit research analyst at BlackRock Inc. in Princeton, New Jersey, which oversees $111 billion in municipal debt and owns Chicago bonds.

"It is hard to see a case where the credit greatly improves from here and stability is the task at hand," Gankiewicz said in an emailed statement. "This degree of uncertainty is uncommon in the muni market and is likely to continue to spook traditional buyers."