Chicago and Illinois' stable outlooks trickle down to transit
CHICAGO -- The Illinois Regional Transportation Authority and its service board, the Chicago Transit Authority, earned an outlook boost from Moody's Investors Service on $5 billion of combined debt as the city and state’s downward credit pressures have stabilized.
Moody’s on Wednesday affirmed the A2 and raised the outlook on the RTA’s sales tax bonds to stable from negative affecting $1.6 billion of debt. The RTA has about $2.2 billion including $285 million of working cash notes not rated by Moody's.
The CTA — one of three service boards that fall under the RTA’s fiscal oversight — received a boost to a stable outlook from negative on its $3.3 billion of sales tax revenue bonds and $64 million of lease debt that is rated at A3 and Baa1, respectively. Both ratings were also affirmed.
“The stable outlook reflects the recently stabilized credit positions of key related governments, Illinois and Chicago,” Moody’s wrote in both reports. “Moreover, the importance of transit to the area served by RTA operating units should limit adverse actions by Illinois and Chicago, despite the long-term liability pressures that these governments face.”
Moody’s revised the state’s outlook on July 19 to stable from negative and it revised Chicago’s outlook to stable from negative on July 12, moving over the next week to also stabilize the ratings of the city’s sister agencies and on city water, wastewater, and motor fuel bonds.
Moody’s added that with solid economic trends in Chicago and suburban area, pledged regional sales tax collections are expected to increase, supporting both the RTA and CTA’s credit profiles for the next one to two years.
The RTA rating recognizes its ample coverage of maximum annual debt service from a regional sales tax that’s levied on a broad economic base, and the importance of mass transit to the greater Chicago area served by RTA's service boards.
The strengths are offset by the RTA’s exposure to increasing fiscal pressures due to the state, Chicago, and other local government pension woes. The state is at the lowest investment grade level of Baa3 and the city carries a Ba1 rating, one level below investment grade.
The RTA could win an upgrade if state funds flow with more regularity, which would reduce the need for short-term cash flow note borrowing, if local and state government pension funding pressures are eased, and improved bondholder protections are adopted. Longer state aid payment delays or weaker tax collection that reduce debt service coverage ratios or an erosion of liquidity could drive a downgrade.
The RTA provides oversight, regional planning and funding for the CTA, Metra commuter rail, and Pace suburban bus service.
The CTA’s sales tax bonds are secured by tax receipts and state matching payments released by the RTA after it meets its debt service requirements. The CTA’s sales tax-retirement benefit funding bonds are additionally secured by Chicago real estate transfer tax payments with an average amount of $67 million annually in recent years.
The CTA, which operates the second largest transit system in the nation, serving 1.7 million passengers daily, could win an upgrade with a pledge of new or increased revenues, sustained debt service coverage improvement, and more stringent legal protections for bondholders. While sales tax shortfalls caused by economic conditions and prolonged debt service coverage decline from increased borrowing or revenue declines could drive a downgrade.
Illinois’ outlook shifted to stable as Moody’s said it believes the budgetary benefits of the state's recent income tax increase and near-term fiscal risks that remain manageable offset the state’s mounting pension costs and other strains over the outlook period.
Chicago’s outlook shift was due to enacted tax increases to better fund pensions and an easing of Chicago Public Schools’ liquidity and budget strains thanks to new state aid and higher tax levies to support pensions.