CHICAGO - (Business Wire) Fitch Ratings assigns an 'AA' rating to the city of Chicago's (the city) sales tax bonds as follows: --Approximately $68,325,000 sales tax revenue refunding bonds, series 2009A;
--Approximately $2,150,000 sales tax revenue refunding bonds, taxable series 2009B;
--Approximately $20,072,690 sales tax revenue refunding bonds, taxable series 2009C.
The bonds are expected to price on or about Oct. 6, 2009, via negotiated sale.
Concurrently, Fitch affirms the city's 'AA' rating on its outstanding sales tax bonds and the city's 'AA' general obligation (GO) rating bonds, and revises the Rating Outlook to Negative from Stable. Fitch also downgrades the city's motor fuel tax bonds to 'A-' from 'A+'. The Outlook on the motor fuel tax bonds is Stable.
The 'AA' rating on the city's GO and sales tax bonds continues to reflect its broad economy and tax base, diverse revenue stream, and sound reserves outside of the corporate fund. Revision of the Outlook to Negative is based on the large structural imbalance in the city's operating funds, which has grown to nearly 20% of the budget for 2010; and a weakened local economy, with a challenged housing market and heightened unemployment. Sales tax debt service coverage remains very high, at 19 times (x), despite the recent softening in sales tax collections. Additional bondholder protection is provided by a strong additional bonds test of 5x maximum annual debt service.
While the economy remains diverse, the city has a high degree of exposure to subprime mortgage risk and foreclosures significantly exceed the national average. In fiscal 2010, the city faces a $520 million budget gap and, while long-term reserves derived from asset leases remain very sizeable, the city expects to use much of its medium-term reserves to close budget gaps in 2009 and 2010. The structural imbalance between revenues and expenditures is large - at least $350 million. While the city has taken strong steps to reduce spending, including instituting furlough days, eliminating vacancies, and laying off workers, Fitch notes that spending constraints are great given a highly unionized workforce. The city's 'AA' rating incorporates that the $900 million of perpetual reserves will be maintained; any use could trigger negative rating action. Additionally, further deterioration in the local economy could potentially also spur a downgrade.
The downgrade of the city's motor fuel tax bonds from 'A+' to 'A-' reflects the weakening of the state of Illinois' credit profile (GO bonds rated 'A' by Fitch) since the motor fuel tax bonds were last reviewed. Motor fuel tax revenues are collected by the state and local distributions are subject to annual appropriation by the state legislature; thus the rating is one notch below the general obligation rating of the state. Fitch remains concerned with the state's ability to alter the distribution formula or identify more priority allocations, as distribution of the motor fuel tax revenues only occurs net of these prior allocations. Coverage on the city's motor fuel tax bonds remains strong at 3.7x in fiscal 2008.
Fitch has long noted the city's use of non-recurring funding sources, primarily a portion of proceeds from fixed asset sales and long-term leases, for near and intermediate-term budget relief. Fitch will monitor management's ability to fund its largely inflexible spending requirements once sizable non-recurring funding sources are exhausted. Currently, the city maintains $900 million in long-term reserves, boosting its available resources. Although the city's corporate fund balance is effectively nil, reserves equaled about 20% of spending including medium- and long-term reserves for fiscal 2008. In 2009, the parking meter lease proceeds bolstered the city's financial position as long-term reserves climbed to over $1.5 billion when available long- and mid-term funds are included. While Fitch views negatively any use of proceeds derived from long-term asset leases for near-term budget relief, the planned spending of these sources through 2012 provides the city with time to develop long-term budget measures to better match recurring spending with revenue.
In summer 2009, city officials identified a revenue shortfall of $300 million for 2009 and a potential budget deficit of $520 million in 2010, resulting from a combination of weaker than expected revenue (particularly real estate transaction, sales, and income taxes) and spending increases stemming from personnel and related benefit costs. Additional concerns about the city's ability to achieve structural budget balance in the near-term include the sizable fund balance drawdowns in 2006 and 2007, which were years in which the city saw sound economic growth; in 2008, final results were balanced only due to the use of debt proceeds that advance-funded the corporate fund in anticipation of parking meter lease proceeds. The city's high fixed-cost burden stems from above average debt levels, low pension funding ratios, and uncertain but presumed significant other post-employment benefit liabilities. Although a blue ribbon panel has been convened to offer a strategy for pension funding, police and fire pensions are currently both well below 50% funded.
Economically, the city continues to have significant challenges in the housing market and persistent job loss in the financial services, construction, and manufacturing industries. Several large employers have laid off a sizeable number of employees and the city's July 2009 unemployment rate was 11.5%, well over the national average. Fitch expects economic recovery in the city may lag that of the nation.
Debt levels are above average but in the moderate range, as the tax base has expanded in recent years. Fitch believes the city's overall fixed cost burden is a constraint, including the needs of the city's four pension plans. Officials estimate the city's liability for other post-retirement benefits at $1.1 billion, but this figure will need to be refined. The city's settlement with its retired employees to pay a portion of the city's defined benefit healthcare plan expires June 30, 2013, and any additional liability will be determined after that time.
For further information on Fitch criteria regarding special tax ratings, please see Fitch's report 'Rating Guidelines for Special Tax Bonds', dated July 14, 2009.
Additional information is available at 'www.fitchratings.com'.
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