CHICAGO - With a provisional Aa3 rating from Moody's Investors Service in hand, the Chicago Transit Authority expects to submit its proposed $1.8 billion taxable pension-related revenue bond issue to the Illinois auditor general's office for review this week.
The auditor general has up to 60 days to review and sign off on the deal and the CTA then has up to 120 days to complete the transaction. The auditor's approval and the timeline were included in legislation approved in January by the General Assembly that authorized the issue.
The financing represents one piece of the transit bailout package that included a sales tax increase in the Chicago area and an increase in Chicago's tax on real estate transactions. The tax hikes will provide an additional $500 million annually for the region's transit agencies that operate under the Illinois Regional Transportation Authority, including the CTA, Metra commuter rail, and Pace suburban bus service. The CTA's piece this year from the tax increases totals about $120 million and about $200 million in future years.
The deal includes two series as tentatively proposed by the CTA - a $578 million tranche to fund a permanent health care trust that would be established to cover retirees other-post employment health care benefits. A second tranche for $1.2 billion would go bring the funded ratio of the CTA's pension fund up to about 80%.
The unfunded pension liability currently stands at $3.5 billion for a funded ratio of just 30.2%. The CTA is required to reach a 90% funded ratio by 2060.
The state legislation requires both the agency and its union employees to increase their contributions, restricts some benefits for new hires, 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.
The bonds are to be secured by deposits made into a sales tax receipts fund and transfer tax receipts fund. The deposits come from proceeds of the increase in the city's tax on real estate transactions and the CTA's share of RTA sales taxes collected in the region after sufficient funds are withdrawn to cover the RTA's own debt service obligations, operational costs and distributions to Pace and Metra. Deposits also include the CTA's share of matching public transportation funds provided by the state.
Moody's analysts said the new credit reflects the region's broad and diverse economy, the CTA's important role in the Chicago region's transportation network, the increase in operational aid from the sales tax hike, a senior claim held by the RTA on sales tax revenues and the various legal provisions of the transaction.
"What we are most comfortable with is that the level of residual sales taxes that are distributed to the CTA after the RTA meets its debt service obligations provides ample coverage for the bonds under any number of stress scenarios," said Moody's analyst Shawn O'Leary.
It's expected that closer to the pricing of the deal, Moody's would assign a formal rating and a global-equivalent rating based on its scale that is being revised. It's also expected that Standard & Poor's will rate the issue, but not Fitch Ratings. Members of the finance team stressed that the deal's structural details remain tentative, pending the auditor's review.
The bond covenants will require that pledged revenues for any 12 consecutive months in the preceding 18 month period provided at least a two times coverage ratio of maximum annual debt service before any additional bonds are issued on parity with the $1.8 billion issue. The transaction will include a debt service reserve funded from bond proceeds to cover 0.5 of maximum annual debt service.
The CTA, which operates the second largest public transit system in the nation, can use surplus proceeds of its share of the sales tax and real estate taxes for general operations only after an adequate monthly transfer is made into the accounts from which debt service is paid. The real estate transfer dollars are guaranteed to flow to the Transit Authority through an irrevocable intergovernmental agreement between the city and the CTA.
The rating released by Moody's yesterday is provisional due to the potential for changes in the legal structure of the transaction and the timing of the sale.
"Moody's will review the legal structure following the auditor general's review period and assign a definitive rating within 30 days of the sale date," the report said.
One of the primary goals of the CTA's finance team was to craft a structure that captured an underlying credit in the double-A category, an issue made all the more important to investors by the recent downgrades of monoline bond insurers.
Despite the structure's strengths, there are some weaknesses stemming from the legal provisions and economic risks. The RTA holds the first claim on sales tax revenues and the city tax on real estate transaction is considered one of Chicago's more volatile taxes. Collections were down 15% in fiscal 2007 over the prior year due to the real estate market slump.
The CTA in its debt service schedule offsets some of that risk with conservative growth rates anticipated in its taxes. Using a scenario under which the real estate transaction tax declines and sales taxes grow at a rate slightly below historical averages, the authority would maintain a 5 times debt service coverage ratio. That level falls to 3 times when an even more negative view on compounded growth is assumed and future debt that might be issued by the RTA is included.
Other weaknesses include the CTA's heavy reliance on other government entities to cover its operating and capital expenses and its pension funding schedule reliance on an "somewhat aggressive" 9% rate of return, according to Moody's.
Prior to the approval of new operating aid earlier this year, the CTA faced a cash crunch. It had a narrow 11 days cash on hand in fiscal 2006 that improved to a still narrow 34 days cash on hand for fiscal 2007. The authority also was forced to divert more than $150 million of capital funds between 2003 and 2007 to cover operating deficits although that practice won't continue into this year.
The CTA remains strapped for capital funding. It has $2.4 billion of projects it hopes to fund through 2012, but another $6 billion in unfunded needs. A $25 billion capital budget is pending before the General Assembly, but it's unclear whether Gov. Rod Blagojevich and lawmakers will resolve their differences over funding issues for a plan to win passage during the current legislative session.
CTA finance chief Dennis Anosike said in a recent interview that the agency faced a growing fiscal threat on four fronts: skyrocketing payments owed on its pension and health care liabilities, annual struggles to make ends meet in its operating budget, and a need for more capital dollars.
"We believe we have mostly solved the first three and hope the final will be addressed this year in Springfield," he said.
After the upcoming transaction, the CTA will have $2.6 billion of debt, most of which was sold to fund various projects and is secured by the authority's share of federal capital grants. About $80 million was sold through the Chicago Public Building Commission and is secured by lease revenues.
The team bringing the new deal to market includes book-running senior managers Loop Capital Markets LLC, Morgan Stanley, and UBS Securities LLC. The co-seniors include Goldman, Sachs & Co., Cabrera Capital Markets LLC, and Siebert Brandford Shank & Co. The financial advisers include Mesirow Financial Inc., Peralta Garcia, Columbia Capital Management LLC, and Scott Balice StrategiesLLC.
Bond counsel is Katten Muchin Rosenman LLP and co-bond counsel is Burke Burns & PinelliLtd. and Gonzalez, Saggio Harlan LLC. Underwriters' counsel is Perkins Coie LLP and Chapman and Cutler LLP. Co-underwriters counsel are Charity & Associates PC and Golden and Associates.