Chicago Transit Agency Readies $2B for Pensions, Health Care

CHICAGO - The Chicago Transit Authority this month is expected to select an underwriting team for its sale of $1.9 billion of pension obligation bonds that is planned this spring in a restructuring of the agency's $3.5 billion unfunded pension and health care liabilities.

The bond proceeds will allow the CTA to bring the funded ratio of its general pension plan up to a 65% funded ratio from a ratio of just 30.2% as of Jan. 1, 2007 and to establish a health care trust fund that will fund the CTA retirees health care benefits.

This plan will take pressure off the CTA's operating budget and "get the pension fund on more solid footing," CTA board chairwoman Carole Brown, who is a public finance banker at Lehman Brothers, said after a board meeting last week.

Separately, the CTA is also planning on selling as soon as next month $250 million of bonds secured by federal capital grants in a deal being senior managed by George K. Baum & Co. to finance various projects.

The pension financing was part of the transit bailout package state lawmakers approved earlier this year that will provide the Regional Transportation Authority and its service boards including the CTA, Metra commuter rail and Pace suburban bus service with $500 million of new revenue annually. The funds - from a sales tax increase in the region and a hike in Chicago's tax on real estate transactions - will help shore up the struggling systems' operating budgets.

The CTA's finance team is still working on the pension deal's structure and is awaiting insight from its financial adviser and the underwriting team it will soon name. The authority has cited the roughly $100 million in city real estate transfer taxes it will receive as the source of repayment, but that doesn't mean the funding stream will secure the bonds.

"Our hope is to get ratings in the double-A category, so that will drive our decisions on security," Brown said.

While the infusion of the new cash will ease the CTA's annual operating crisis, it is the pension restructuring - including funding reforms agreed to by its unions - that will allow the agency to escape the even more significant fiscal threat its unfunded pension liabilities pose.

The CTA faced a 2009 deadline to adopt a funding plan to bring its pension fund up to a 90% funded ratio by 2058 under a General Assembly mandate adopted in 2006. The authority was facing a massive increase in the coming years of an annual required contribution of as much as $250 million annually, according to Brown, compared to its far smaller scheduled payments including $24 million in fiscal 2006.

The CTA legislation requires both the agency and its union employees to increase their contributions, restricts some benefits for new hirees, revises fund oversight, and segregates for the first time health care benefits for retirees with the future funding burden relying on contributions to the new trust from employees and retirees. If the pension fund's ratio falls below 60%, CTA and employee contributions would go up so that the fund remains on track to reach a 90% funded ratio by 2059.

The authority, which serves nearly 1.6 million passengers daily, would use up to $1.3 billion of the pension obligation bonds to better fund its pension plan and another $639.7 million for the health care trust. "While the sizeable borrowing will likely significantly increase the CTA's presently modest debt ratio, Moody's views the pension funding plan as an important aspect of maintaining the CTA's credit quality," Moody's Investors Service analysts wrote in a recent report affirming the A2 underlying rating on the CTA's $578 million of outstanding capital grant receipt-backed bonds.

Moody's reported the liabilities at $3.5 billion for a 30% funded ratio, while the Civic Federation of Chicago in a recent report cited fiscal 2006 figures of $4.2 billion, including $2.5 billion for pensions and $1.8 billion for healthcare for an overall funded ratio of 25.2%.

Proceeds from the new capital grant-backed bonds will finance various projects outlined last week by CTA and Chicago Mayor Richard Daley who also used the occasion to push state lawmakers to pass a capital budget. "This is a one-time federal investment in our capital needs... Unfortunately, the state legislature has yet to provide meaningful long term capital funding for the system and we haven't received capital funds from the state in more than four years," Daley said at a news conference.

The CTA has a $2.4 billion five-year program but has $6 billion in unfunded needs. Its capital program has also been strained by the diversion of $150 million in capital funds over the last five years to subsidize operations.

The agency's outstanding capital grant bonds were sold in 2004 and 2006 and are secured solely by federal Section 5307 formula fund grants. The CTA also has $89 million of lease revenue refunding bonds issued in 2006 through the Chicago Public Building Commission. More traditional debt issuance that finances the CTA's capital projects is done by the RTA and secured by that agency's share of regional sales taxes although it has nearly exhausted all of its existing state-authorized borrowing capacity.

Moody's said the CTA's credit strengths include passage of the bailout program, the system's importance to the region, a modest debt burden, and the stable history of federal capital funding grants. Its challenges include narrow liquidity levels, limited financial flexibility, the prospect that an economic slump will hurt sales tax collections and significant capital needs.

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