CHICAGO - Moody's Investors Service yesterday downgraded the Chicago Transit Authority's $1.9 billion of debt from its 2008 pension-related issue one notch to A1, citing the compounding strains of faltering sales and real estate transaction taxes along with Illinois' liquidity problems.

The action follows Moody's decision in June to downgrade the state's Regional Transportation Authority $2 billion of debt to Aa3 from Aa2.

Sales taxes and state public transportation aid are the primary sources of repayment for both the RTA general obligation bonds and the CTA's pension and other post-employment benefits financing, although the CTA's debt carries a pledge junior to that of its parent agency. A portion of real estate transaction taxes in Chicago also secure the CTA's debt.

The state approved a sales tax increase in the region in early 2008 as part of a transit bailout package for the RTA that included the authorization for the CTA's taxable sales and transfer tax issue aimed at reducing the strain of growing pension costs on its balance sheet. Under that package, Chicago also raised its real estate transaction tax to help the CTA repay the debt.

Though the infusion of cash from both taxes has helped, collections are tracking below estimates at the time of the CTA's issue in the summer of 2008, while the state's own liquidity problems as it grappled with a $12 billion deficit going into fiscal 2010 have led to delays in state transit aid payments.

"The downgrade is a due to a combination of factors largely beyond the CTA's control that include the deteriorating credit quality of the state and the RTA," said Moody's analyst John Ceffalio. "Both taxes are also underperforming and state has periodically fallen behind on its statutory match. The CTA's bonds are also junior to the RTA so we are maintaining with the downgrade the one-notch distinction between the two."

The state payment delays drove the RTA to issue $260 million of cash-flow notes in June to shore up its own liquidity. Moody's put CTA's bonds on negative watch shortly after downgrading the RTA's bonds in June.

"While the CTA bonds have strong legal protections, in several key areas the RTA bonds are superior: RTA bondholders enjoy a higher debt-service reserve requirement and a stronger additional bonds test than CTA bondholders, and all of the RTA's pledged revenues pass through its trustee," yesterday's report read.

The CTA received $342 million from sales taxes last year, up from $300 million last year and expects $366 million this year. Absent the tax increase, the the authority's sales tax receipts would have dropped by 3.2% last year and 12% this year.

The forecast for 2010 is flat with growth expected to return in 2011. The CTA received $30 million from the real estate tax last year and expects $25 million this year. Revenue from that tax is down dramatically, however, from a high in 2006, hurting Chicago's budget as well. Though weakening due to the recession, the tax revenues pledged to the CTA's bonds will provide a "satisfactory" 2.4 times debt service coverage ratio, Moody's wrote.

The state bailout plan, bond issue and new tax increase were aimed at stabilizing the finances of the RTA and its service boards that include the CTA, Metra commuter rail and Pace suburban bus service, but the recession and massive capital needs still strain their balance sheets.

The CTA had hoped to end its diversion of capital funds for operating costs but in 2009 will use $128.6 million and its proposed 2010 budget relies on a similar level. The agency has $178 million of cash and cash equivalents, of which $18 million are restricted, a narrow position that is however significantly improved from a year ago, Moody's wrote.

The CTA operates the second largest transit system in the country with bus ridership of 328 million and rail ridership of 198 million annually, up 5.4% in 2008 from 2007. Ridership has grown annually by about 2% between 2003 and 2008 although it has dropped slightly so far this year due to the recession and a fare increase

The pension issue allowed the CTA to raise its pension funding ratio to nearly 76% from 37% and to fully fund with a trust its unfunded OPEB liability. The bonds are rated AA-plus by Standard & Poor's with a stable outlook.

At the lower rating, Moody's outlook on the CTA's pension-related bonds is stable. Moody's yesterday also affirmed the A2 ratings on the authority's lease revenue bonds issued through the city's Public Building Commission for its new headquarters and on its capital grant bonds backed by federal funds.

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