CHICAGO — The Chicago Park District's tight governance link to the Chicago city government is taking a toll on its credit rating.

Moody's Investors Service cited those ties, despite an otherwise sound fiscal position, as the reason for downgrading the district to Baa1 from A3 late Thursday.

The outlook remains negative. The park district downgrade followed Moody's downgrade last week of Chicago's rating over its growing unfunded pension obligations.

The park district action impacts $616 million of general obligation bonds, including $333 million of unlimited tax debt and $283 million of limited tax paper. All but $40 million of the district's debt is in a fixed-rate structure so the downgrade doesn't raise any potential swap termination problems as the city downgrade to Baa2 did.

The park district won a legislative overhaul of its pension system last year that so far has escaped a legal challenge; it also carries strong reserve levels, and its financials are sound thanks to rising fees. Those factors couldn't stave off the downgrade.

"We expect that the district's financial operations will likely remain sound in the near term, but the city of Chicago's formidable budgetary challenges will pose an increasing risk to the district's financial position in coming years," Moody's wrote.

"Given the city's extreme budget pressures, we believe CPD's financial operations and position could be indirectly affected through city officials' influence on policy making and budgeting," Moody's wrote.

Previous downgrades of the city's bonds have triggered similar action on the park district and Chicago Board of Education's ratings due to governance links and their shared tax base. Reliance on an overlapping tax base to fund operations and growing pension burdens were also cited as a factor in past downgrades of Cook County and the Metropolitan Water Reclamation District of Chicago.

Like Chicago, the park district voiced disappointment over the downgrade and sought to highlight the differential in its credit compared to other rating agencies. It carries low to high double-A level ratings from Fitch Ratings, Kroll Bond Ratings Agency, and Standard & Poor's.

"The action makes it clear that Moody's does not understand that the Chicago Park District is an entirely separate government under state law, and has been for over 80 years," the district's administration said in a statement.

"Moody's also either misunderstands or lacks clarity of the strong legal protections in place for the Park District's bond holders under related bond ordinances as well as a dedicated stream of revenues and separate levies that are in place to fund 100 % of the debt service," the statement said.

Chicago Mayor Rahm Emanuel holds sway over sister agencies like the park district and school board through his power to appoint board members, and the mayor handpicks the top administrator. While all hold their own bonding and taxing powers and their debt is legally separate, it's widely known city hall holds sway over major policy decisions like raising tax levies.

Moody's warned that factors which could potentially trigger a further slide include deterioration in Chicago's credit profile "that leads to declines in CPD's credit quality given the two entities' governance ties and coterminous tax base" or a substantial reduction in its reserves or liquidity.

The district closed out 2013 with a $185 million operating fund balance, 54% of revenues, with about $96 million is allocated to working capital and $25 million to help cover liabilities. Under its pension reforms, the district owes supplemental contributions of $12.5 million in 2015 and $12.5 million in 2016 to be funded with reserves, while a $50 million payment owed in 2019 is expected to be covered with reserves and pension obligation borrowing.

The Chicago Park District's unfunded obligations grew in the last year to $484 million for a funded ratio of 45.5%, from $426 million and a funded ratio of 51% the previous year. The funded ratios are slated to slowly improve through 2046 when a funded ratio of more than 90% is projected under reforms approved by state lawmakers that took effect Jan. 1.

Moody's warned that while the changes help stabilize the pensions, some risk remains as future annual contributions remain tied to a percentage of employee contributions, although at a higher multiplier rate, and not a formula based on actuarial assumptions.

Moody's decision to downgrade the park district in the wake of the city downgrade raises the specter of a possible school board downgrade.

The rating agency last August affirmed the school board's Baa1 rating and negative outlook assigned to $6.3 billion of GOs but warned that a downgrade could come should the school system fail to structurally balance its operations, if it sees declines in reserves or liquidity or further state aid delays, or its unfunded liabilities grow.

Also, a downgrade could follow a decline in the city's credit profile that "leads to declines in CPS's credit quality given the two entities' close governance ties and coterminous tax base."

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