Fitch Ratings said it has downgraded the ratings on the following Chicago obligations: $8.1 billion unlimited tax GO bonds to BBB-plus from A-minus; $546.5 million (accreted value) sales tax bonds to BBB-plus from A-minus; and $200 million commercial paper notes, 2002 program series A (tax exempt) and B (taxable) bank bond ratings to BBB from BBB-plus.
At the same time, the ratings have been placed on Negative Watch.
The ULTGO bonds are payable from the city's full faith and credit and its ad valorem tax, without limitation as to rate or amount.
The sales tax bonds have a first lien on the city's 1.25% home rule sales and use tax and the city's local share of state-distributed 6.25% sales and use tax. Additionally, there is a springing debt service reserve, funded over a 12-month period that would be triggered if coverage fell below 2.5x.
The bank bond rating for the commercial paper (CP) notes is based upon the city's general obligation pledge payable from any legally available funds without an ability or obligation to levy additional taxes.
The downgrade reflects increased fiscal pressures on the city following last week's Illinois Supreme Court decision severely limiting the ability to modify pension benefits in the state and a subsequent downgrade of the city's credit to below investment grade.
Fitch does not believe that the Supreme Court decision has a direct effect on the prospects for the city's enacted pension reform, which relies on a different legal argument.
However, the events of the last week have amplified the city's numerous fiscal challenges and are likely to further limit the city's investor/lender base, resulting in a risk profile that Fitch believes is no longer consistent with a rating in the A category.
The Negative Watch stems from the near-term uncertainty regarding the city's liquidity position due to the effects of the recent downgrade, which constituted a termination event under the city's GO and sales tax swap agreements as well as an event of default for its short-term borrowing program and bank support agreements for variable rate GO and sales tax debt. Fitch believes that the city's plans to deal with these developments are reasonable and manageable, but inherently carry execution risks. Failure of the city's efforts could result in a significant rating downgrade.
The recent Illinois Supreme Court ruling striking down the state's pension reform legislation (SB1) has only a marginal immediate effect on the city's plans to reform its own pension plans. The city's legal argument supporting its reform plan for the Municipal and Laborers' pension plans is different than that of the state and therefore the decision does not directly affect the outcome of the legal challenge to the city's pension reform legislation. The outcome of that litigation is still unknown and an adverse decision could cause a further downgrade.
The BBB-plus rating recognizes the city's role as an economic hub for the Midwestern region of the United States with a highly educated workforce and improving employment trends. Aside from its pension funding challenges, Chicago's financial profile has markedly improved i
