CHICAGO — The Chicago Transit Authority's sales tax rating took a hit from Moody's Investors Service, triggered by escalating capital needs and what analysts believe is an unfavorable political landscape to raise revenues for the system as the city and state grapple with pension woes.
Moody's lowered the CTA's $2.9 billion of sales tax revenue bonds one notch late Friday, to A1 from Aa3, and assigned a negative outlook, while lowering its rating on $77 million of lease debt sold through the Chicago Public Building Commission to A2 from A1.
The CTA questioned the reasoning behind the downgrade given its strong sales tax growth and steady fare and non-farebox revenues growth. "There has been no new fiscal change to CTA's position over the last year and CTA strongly objects to this downgrade based on the facts," the statement read.
The CTA joins Chicago and several other sister agencies including the Chicago Park District and Chicago Board of Education that have seen their Moody's ratings slide. Moody's hit Chicago with a three notch downgrade of its general obligation rating over the summer. Cook County and the Metropolitan Water Reclamation of District of Chicago have also seen downgrades, all primarily due to struggles over pension obligations and the overlapping burden they pose to the same tax base.
The CTA faces its own pension strains even though sweeping legislation that raised its sales tax and reformed its pensions in 2008 were supposed to fix its system. But it was neither those pressures that drove the downgrade nor any near-term debt service coverage deterioration as the CTA's sales tax revenues have rebounded and coverage remains sufficient.
Instead, analysts attribute the CTA's weakened credit quality to mounting pressures to further leverage the revenues that repay its debt.
"First, in view of growing credit pressures on Chicago, Cook County, and the state of Illinois, we believe the political will to impose further revenue increases has diminished," Moody's wrote.
"Second, the CTA system faces growing deferred maintenance and capital needs that will require funding from new debt issuance and other sources, at a time when state and federal support is likely to dwindle," analysts added.
The rating agency has long viewed the credit as one that has sufficient support from other governments that there would be "a willingness to increase revenue if needed" because of the CTA's significance to a diverse and vibrant region, according to Moody's analyst Edward "Ted" Hampton. Moody's now believes that willingness has been eroded. The factors driving the downgrade are somewhat unique to the CTA as the rating agency has been taking a more collective view of the region's intertwined credits given their reliance on the same tax base. Transit agency credits typically are more isolated from government credit pressures, Hampton said.
"Moody's subjective opinion about political will in Springfield and regional credit pressures have no impact on CTA's ability to manage its system or manage risk to bondholders," the CTA statement said. "CTA has not asked for any additional funding/increased sales tax rate from legislators, nor has projected to do so in the future. We operate within our financial means."
The CTA reported unfunded liabilities of $1.15 billion for 2012 but they rise to an adjusted net liability figure of $2.97 billion when Moody's applies uniform discount rates, amortization, and other factors to the valuation. That's up 41% over the prior year. The funded ratio based on the adjusted figures is just 35.9% compared to 46% a year earlier.
Other challenges straining the credit include persistent delays in pledged state matching funds. The state payment delays have improved of late but could worsen as the authority grapples with rising pension payments amid a political impasse on reforms and the looming partial expiration of an income tax increase. The CTA also faces increasing pension challenges that "may strain its operating budget," Moody's wrote.
"The negative outlook reflects our view that increased leverage of pledged sales tax revenues will be needed in coming years to address large capital funding needs, while increases in pledged revenues are unlikely, given the growing fiscal pressures on Chicago area's tax base," Moody's wrote.
Chicago Mayor Rahm Emanuel is facing a $600 million spike in pension payments in 2015 absent a state approved pension overhaul. Future property tax increases are anticipated by many although the size and timing are unclear as Emanuel has stressed the city can't fully fund the increase with taxes. Chicago schools annually seek a maximum permitted property tax increase.
With billions in unfunded needs, the CTA is under pressure to keep in check its fares and other revenues under its control, and it can't raise its sales tax rate on its own. The agency also relies on a portion of the city's tax on property sales for support. Emanuel selects the CTA president and is responsible for four of the seven board appointments while the governor names three.
Moody's assessment highlights the distinction between the CTA's sales tax credit and that of its parent agency — the Regional Transportation Authority of Illinois — which could add fuel to the current debate over the governance structure of the region's transportation system.
The RTA's debt carries a general obligation pledge and enjoys a prior claim on the same regional sales tax and abides by a more conservative debt limit. Moody's rates the RTA's debt Aa3 with a stable outlook.
The RTA has long gone along reluctantly with the CTA's moves to issue debt on its own. The RTA argues it offers the most affordable means to access the capital markets. The RTA, which has exhausted its General Assembly approved borrowing authorization, and the CTA butted heads last year. The RTA initially blocked the CTA's budget which included plans to issue $1 billion of new sales-tax bonds over the next five years. The RTA staff raised concerns over the lack of a line item for debt service and wanted more detailed information on the CTA's plans.
The RTA staff and some board members questioned whether the agency could afford the new borrowing. The RTA provides fiscal oversight of the CTA, Metra commuter rail, and Pace suburban bus service. The CTA eventually provided sufficient information and the RTA board approved a 2013 budget with the borrowing plans.
With $31 billion in needs, the RTA has floated a plan for lawmakers to increase its bonding authorization by $2.5 billion but its future governance structure is currently the subject of a task force named by Gov. Pat Quinn. A preliminary report from the group has found the current structure leads to duplication, uncoordinated service and a lack of accountability.
Moody's said the CTA benefits from its position as an essential regional mass transit provider, a history of support from state and local governments in the region, and improved debt service from pledged revenues. The CTA has proposed a $1.38 billion operating budget for 2014.