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Rating Action:

Moody's Downgrades Regional Transportation Authority Sales Tax Bonds to A2 from Aa3; Outlook Negative

13 Jun 2017

New York, June 13, 2017 -- Summary Rating Rationale

Moody's Investors Service has downgraded the Regional Transportation Authority's outstanding general obligation bonds, which are backed by a pledge of regional sales tax revenues, to A2 from Aa3, affecting about $2.2 billion of outstanding debt. The outlook remains negative.

The downgrade factors in the repercussions of an extended political impasse in the Illinois General Assembly over how to balance the state's budget. After two years of failed negotiations, and operating with substantial budget deficits, the state has allowed a backlog of bill payments to reach record levels, putting pressure on many public- and private-sector entities awaiting state payments, including the RTA. Payment deferrals have led RTA to rely on short-term borrowings that have created biennial refinancing requirements. This practice, while manageable, is only one measure of RTA's potential stress stemming from the continuing financial erosion of its two largest related governments - the State of Illinois (Baa3 negative) and the City of Chicago (Ba1 negative). Over the long term, pressures to provide funding for constitutionally guaranteed state and local pension plans are increasingly apt to harm RTA's economic base, eroding its ability to generate funding to support transit system capital investment and operating needs. Although these factors are outside the RTA's control, they will pose increasingly serious challenges, offsetting the otherwise strong credit profile of the authority's sales-tax revenue debt.

After the downgrade, the RTA sales tax bond rating remains higher than the general obligation debt of either Chicago or the state. The rating differentials (of five and four notches, respectively) between the authority and these related governments are supported by legal and practical insulation of pledged regional sales tax revenues. It also reflects RTA's sufficient debt service coverage from the sales taxes and the authority's role in overseeing transit in a region that relies heavily on maintaining its far-reaching, high-capacity public transportation system. At the same time, fiscal pressures of the local and state governments will make the city and state more inclined to take adverse actions, such as shifting operating expense burdens onto the transit agencies when possible, and the prospects for state capital funding support will be diminished. The lower rating is consistent with RTA's exposure to the state, which collects its regional sales tax and also provides matching payments for those revenues.

Rating Outlook

The negative outlook incorporates the State of Illinois' continuing credit deterioration, which threatens to keep exacerbating ongoing aid payment delays in coming months, without an agreement to bring the state's revenues and expenditures into closer alignment. It also factors in the Chicago area's economic vulnerability to overlapping public pension liabilities, which may necessitate sizable tax increases that erode resources that could otherwise be used to address the transit system's deferred capital investment needs.

Factors that Could Lead to an Upgrade

More dependable flow of state aid funds, reducing the need for short-term borrowings

Mitigation of pension funding pressures affecting related state and local governments

Improved bondholder protections, such as a more stringent additional bonds test

Factors that Could Lead to a Downgrade

Substantial increase in length of state aid payment delays

Weakening sales tax revenue performance and reduction in debt service coverage

Deteriorating liquidity position and lack of market access

Legal Security

RTA's debt is secured by liens on sales taxes imposed by the RTA in its service area and on matching payments from the state's Public Transportation Fund (PTF). The sales taxes are levied at various rates throughout the region. In Cook County, for example, the tax rate for general sales is 1%, while the tax on drugs and prepared food is 1.25%. Collar county general sales are subject to a 0.5% RTA tax. Unlike some state obligations supported by revenue collected by the state's Department of Revenue, the RTA benefits from a primary source that is separated from the state government's operations, flowing directly to a trust account held for RTA outside the state treasury. The payment of regional taxes has not been subjected to budgetary deliberations or to deferral, and it does not require legislative appropriation. Fare-box collections of the RTA's service boards are not available for payment of debt service.

Use of Proceeds

Not applicable.

Obligor Profile

The RTA, a political subdivision and municipal corporation of the state created in 1973, is responsible for the oversight, regional planning and funding of three transit agencies (or service boards) in the Chicago area, which is defined as Cook County and the five surrounding "collar counties." It distributes regional sales tax revenues and state aid payments to the service boards pursuant to state law. The task of actually running transit systems falls to service boards that RTA oversees: the Chicago Transit Authority (CTA), the subway and bus operator in Chicago; Metra, which provides commuter rail service, and Pace, the provider of suburban bus service as well as Americans with Disabilities Act mandated para-transit. RTA requires the service boards to devise balanced budgets and two-year financial plans, and to meet a statutory test on revenues derived from fares (a fare-box recovery ratio). RTA cannot use service boards' fare or other revenues to pay debt service on its own bonds.

Methodology

The principal methodology used in this rating was US Public Finance Special Tax Methodology published in January 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Regulatory Disclosures

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Edward Hampton
Lead Analyst
State Ratings
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Emily Raimes
Additional Contact
State Ratings
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
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New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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