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13 Jun 2017
New York, June 13, 2017 -- Summary Rating Rationale
Moody's Investors Service has lowered the rating on the Chicago Transit Authority's (IL) Sales Tax Receipts Revenue Bonds to A3 from A1, affecting outstanding debt of about $3.67 billion. Also affected by this action are Series 2006 Building Refunding Revenue Bonds issued through the Public Building Commission of Chicago to refinance CTA's headquarters, with $67 million outstanding; the rating on these bonds was lowered to Baa1 from A2. The outlook for these credits remains negative.
The downgrades are driven primarily by the authority's exposure to the State of Illinois, which was downgraded to Baa3 from Baa2 on June 1, amid an extended political impasse in the Illinois General Assembly over how to balance the state's budget. After two years of failing to reach an agreement, and operating with substantial budget deficits, the state has allowed a backlog of payments owed to CTA and other public- and private-sector entities to rise to record levels ($14.68 billion in aggregate as of June 5, according to the state comptroller). This prolonged impasse is putting pressure on various entities like CTA that are awaiting payment from the state. While the practical effects for CTA have been limited so far, the authority has exposure to the deteriorating state government in several ways. Perhaps most important, the state collects regional sales taxes that support CTA and other Chicago-area transit providers, and it also provides other forms of supplemental funding. Like the state itself, CTA faces a worsening pension funding burden. Failure to make required annual pension contributions could jeopardize the flow of funds to holders of some of the authority's debt, although to date CTA has made all required contributions.
The lease debt issued through the Public Building Commission is rated a notch below CTA's sales-tax revenue bonds. These bonds are backed by a pledge of lease payments from the authority that are equal to debt service on the bonds, under a lease that is coterminous with the debt.
The negative outlook incorporates the state's continuing credit deterioration, which threatens to exacerbate ongoing aid payment delays in coming months, barring an agreement to compensate for the state's recent revenue losses. It also factors in the Chicago area's economic vulnerability to tax increases needed to address pension liabilities, which could undermine regional sales tax revenues at a time when regional transit providers are trying to address deferred capital investment needs.
Factors that Could Lead to an Upgrade
Stabilization of related governments' credit positions
Sustained trend of improving debt service coverage
Pledge of new or increased revenues
More stringent legal protections for bondholders
Factors that Could Lead to a Downgrade
Substantial shortfalls in pledged sales tax revenues caused by economic conditions or other factors
Prolonged decline in debt-service coverage, whether from increased borrowing or revenue underperformance
CTA's sales tax revenue bonds are secured by CTA's Sales Tax Receipts Fund (STRF), which receives transfers of RTA sales tax revenues and the state's Public Transportation Fund (PTF) matching payments. CTA's sales tax and PTF revenues that exceed debt service requirements are released for operations. These revenues are allocated under a statutory formula and are transferred by RTA after it has satisfied debt-service requirements on its own sales-tax secured bonds. The CTA's bonds therefore are in effect subordinate to the RTA bonds. An exception to this subordination is that the CTA's 2008 retirement benefit-funding bonds, the largest share of CTA's outstanding sales-tax revenue bonds, are additionally secured by Chicago real estate transfer tax (RETT) payments. The RETT revenues are deposited in the Transfer Tax Receipts Fund. The CTA's share of RETT is assessed at a rate equal to $1.50 per $500 under legislation passed in connection with the 2008 bonds. RETT revenues have averaged about 63 million annually during the past five fiscal years. The CTA bonds issued through the Chicago Public Building Commission are secured by CTA rental payments on the 12-story office building that serves as the authority's headquarters.
Use of Proceeds
The CTA is the largest of the three service boards that provide public transit in the Chicago area, and the second-largest transit system in the US. CTA's buses and trains provide about 1.6 million passenger trips each weekday.
The principal methodology used in the special tax rating was US Public Finance Special Tax Methodology published in January 2014. The principal methodology used in the lease backed rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
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