CHICAGO – Chicago’s motor fuel tax credit took its second ratings hit in a week with Moody’s Investors Service dropping its rating one level to Baa1 citing exposure to Illinois, which has been hit with downgrades over pension inaction.

Moody’s also left a negative outlook on the rating for $271 million of revenue bonds.  The bonds are primarily secured by the city’s share of motor fuel taxes which are distributed based on a state mandated formula and distribution is subject to appropriation. The General Assembly can reduce tax rates and change the allocation formula which is based on population.

The downgrade “reflects the recent downgrade of the state of Illinois’s general obligation rating to A3 from A2,” Moody’s wrote. “The state’s ability to alter pledged revenues presents the risk of non-appropriation. Reflecting this risk, Chicago’s motor fuel tax rating is capped at a rating level below the state’s GO rating.”

Positive factors supporting the rating include the state’s large and diverse economic base from which the tax is generated, sound debt service coverage ratios despite recent declines, limitations on future issuance, and the conservative fixed-rate structure of the credit’s debt portfolio.

Strains on the rating include a slow but steady decline in gross motor fuel tax revenues due the economic downtown, higher fuel prices, and the increased use of fuel efficient vehicles. Another risk is shifts in the city’s population relative to other municipalities.

Moody’s earlier this year hit the credit with a three-notch downgrade as it moved to bring the rating in-line with the state’s rating due to the link. Fitch Ratings last week lowered its rating one level to BBB-plus after downgrading the state’s GO rating. It also left a negative outlook on the motor fuel credit.

Standard & Poor’s does not tie the rating to the state’s credit and assigns a high-grade AA-plus and stable outlook to the motor fuel bonds.

The city is planning a $104 million refunding and a $100 million motor fuel revenue TIFIA issue. Loop Capital Markets LLC is senior manager and Cabrera Capital Markets LLC and BMO Capital Markets are co-seniors. 

The city is offering up additional revenue pledges to secure the bonds including revenues from the federal loan under the government’s Transportation Infrastructure Finance Innovation Act program. Federal authorities have given the go-ahead for the city to formally apply, so a loan is expected.

The TIFIA program provides loans and loan guarantees for rail lines, marine ports, pipelines, airports, highways, bridges, public transportation systems and other transportation-related projects.

The proceeds will help finance the ongoing Wacker Drive reconstruction project which includes an expansion of the downtown riverwalk along the Chicago River. Other additional revenues to be pledged would come from activities slated for the proposed riverwalk such as licensing fees from docks for tour boat operations; advertising; naming rights; and concession sales. The city estimates they would generate at least $2 million during the first year of operations in 2015.

Gross revenues from the tax totaled $1.23 billion in 2011, and declined 1.4% in 2012 to $1.22 billion. Chicago’s piece of the pie is based on its population, relative to all incorporated municipalities in Illinois, so population declines pose a risk. Chicago’s share under the formula was 25% in 2011 and 24.2% -- or $49.4 million -- in 2012.

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