Moody's Investors Service said it has downgraded to Baa2 from Baa1 the rating on the city of Chicago, Ill.'s $8.3 billion of outstanding general obligation debt, $542 million of outstanding sales tax revenue debt, and $268 million of outstanding or authorized motor fuel tax revenue debt.
It also downgraded to speculative grade from VMIG 3 the short-term rating on the city's outstanding sales tax revenue refunding bonds, variable rate series 2002. The outlook on the long-term ratings remains negative.
Concurrently, Moody's affirmed the A2 and A3 ratings on Chicago's outstanding senior and second lien water revenue bonds and downgraded to A3 and Baa1 the ratings on the city's outstanding senior and second lien sewer revenue bonds. The outlook on these ratings also remains negative.
The Baa2 GO rating incorporates expected growth in Chicago's already highly elevated unfunded pension liabilities and continued growth in costs to service those liabilities, even if recent pension reforms proceed and are not overturned in legal appeal.
The city's tax base is significantly leveraged by the direct debt and pension obligations of the city, as well as indirect debt and pension obligations of overlapping governments. The rating also reflects credit attributes, including the city's broad legal authority to tap into its large and diverse economy for new revenue, management's efforts to control growth in other operating costs, and the healthy state of current financial reserves.
The Baa2 sales tax rating primarily rests on the lack of legal segregation of pledged sales tax revenue from the general operations of the city. While the city deposits collected revenue in a legally segregated fund, the collection of revenue is not segregated from the city's operations.
This lack of separation caps the sales tax rating at the city's GO rating, despite very strong coverage of maximum annual debt service (MADS) by pledged revenue. Fiscal 2013 pledged sales tax revenue provided a very strong 15.7 times MADS coverage on secured bonds. The short-term SG rating on the Series 2002 sales tax bonds is based on the long term Baa2 rating and the conditional liquidity support associated with the bonds.
The Baa2 motor fuel tax rating also primarily rests on the lack of legal segregation of pledged revenue from the general operations of the city. Thought the city deposits the collected revenue in a legally segregated fund, the collection of revenue is not legally segregated from the city's operations. While the city directs the state of Illinois (A3 negative) to deposit pledged motor fuel tax revenue with the designated trustee, such direction is not outlined in legal ordinance. Fiscal 2013 pledged motor fuel tax revenue provided an adequate 2.5 times MADS coverage on secured bonds. The state's allocation of motor fuel tax revenue to municipalities is ultimately subject to annual appropriation.
