CHICAGO – The Illinois budget stalemate has claimed the rating of another Chicago bond issuer.
Standard & Poor’s dropped Chicago’s motor fuel-tax backed bonds six notches Wednesday because the state’s lack of a budget throws a monkey wrench into the flow of funds that backs the bonds.
S&P downgraded the credit to BBB-plus from AA-plus and put the bonds on creditwatch with negative implications.
The downgrade puts the bonds, which total $270 million, on the same rating level as Chicago’s general obligation debt.
Debt payments now depend on the city’s “ability and willingness of the city to make payments from funds on hand,” S&P analysts wrote.
“Prior to this point, the ratings had been based on the strength of the flow of [motor fuel tax] funds from the state of Illinois to the city,” analysts said in the downgrade report. “However, a budget impasse at the state is obstructing the disbursement of the MFT revenues to the city; Chicago has not received monthly MFT revenues from the state since August.”
Debt service on the bonds is payable from the MFT revenues as well as additional sources pledged by the city in 2013 when it entered into a Transportation Infrastructure Finance Innovation Act loan tied to the city’s downtown Riverwalk project.
“The creditwatch negative reflects the risk that the flow of MFT revenues may not be resumed in the next 90 days,” the report says. “[I]f the city’s currently available MFT revenues are exhausted, and the MFT revenue distributions from the state have not resumed, there could be further credit degradation on the ratings.”
The downgrade comes with Illinois in its fourth month without a fiscal 2016 budget.
Republican Gov. Bruce Rauner and the General Assembly’s Democratic leaders remain locked in a political stalemate over the budget.
Chicago made its monthly debt payments on the bonds in August and September by tapping unspent MFT revenues it had received from the state earlier in the year.
It plans to make the October and November payments from the same source, according to ratings analysts.
The city says it has enough revenue on hand to make the January 2016 bond payment as well. Biannual debt service payments to holders are made in January and July.
“The city has indicated a willingness to use other nonpledged resources to avert a default of the 2008 and 2013 bonds and TIFIA drawdown loan; however, the city projects that accumulated MFT revenues could be exhausted by January,” analysts said.
The situation resembles in some ways one faced recently by the Metropolitan Pier and Exposition Authority; state sales and tourism taxes in a project fund pledged to repay the authority’s bonds could not be transferred to the trustee without an appropriation, triggering a technical default when the authority missed a monthly payment in July.
The issue has since been remedied with legislation freeing up revenues for transfer, but not before Fitch Ratings and Standard & Poor’s stripped the MetPier bonds of their high-grade double-A to triple-A ratings.
For the fuel tax bonds, the primary source of bond repayment comes from the city’s share of the state’s tax of 19 cents per gallon of motor fuel sold and an additional 2.5 cent surcharge on diesel fuel. Additional revenue from the Riverwalk project includes money from concessions, goods and services, special events and other sources.
The downgrade puts S&P’s rating on the same level as Fitch, which on Sept. 30 affirmed its BBB-plus rating and negative outlook on the bonds.
Moody’s Investors Service ties the motor fuel bonds rating to the city’s credit, and so downgraded them to junk-level Ba1 in May along with Chicago’s general obligation rating.
Pending legislation would allow the state to distribute the motor fuel revenues without a budget, but is likely to get caught up in the political standoff.
The state Senate passed the measure in September but it was not called up in the House because it lacked the votes. The House returns on Oct. 20.
Even if the bill passes, it faces a likely veto, because Rauner has said he opposes the measure, which is part of a $3.9 billion appropriation provision aimed primarily at funding human services programs, saying it promotes an unbalanced budget.
Chicago is allowed to make transfers to the trustee even without the motor fuel tax in hand.
The bonds also enjoy strong legal provisions, including a first-lien pledge and direct deposits with the trustee.
New legislation was also recently filed that would free up motor fuel tax revenues for local governments across the state. House Bill 4305 would also free up local gambling revenues for distribution.
“Chicago continues to tackle the financial challenges at our doorstep with real reform that stabilizes our finances and continues the progress made to grow our economy,” Chicago Mayor Rahm Emanuel’s administration said in a statement Wednesday.
“The action by S&P to downgrade the City’s motor fuel tax credit is a direct result of state inaction, and the City urges the Governor and legislature to pass a state budget that maintains the safety of our roads, bridges and other vital infrastructure, which is supported by MFT funding,” the statement said. “Until then, the city will continue to responsibly fund our infrastructure maintenance with general operating funds for the safety of our residents with the expectation that the state budget impasse will eventually be resolved and the City will be reimbursed.”
