New York, July 26, 2021 -- Moody's Investors Service has affirmed the Ba1 rating on the City of Chicago, IL's outstanding general obligation (GO) unlimited tax bonds, the Ba1 rating on outstanding motor fuel tax revenue bonds, the Baa2 rating on outstanding water revenue bonds, the Baa2 rating on outstanding senior lien sewer revenue bonds and the Baa3 rating on outstanding junior lien sewer revenue bonds. Concurrently, Moody's revised the outlook on all of the ratings to stable from negative. As of the close of fiscal 2020, the city's outstanding debt was comprised of $7.1 billion in GO bonds, $181 million in motor fuel tax revenue bonds and $4.4 billion in water and sewer revenue debt.
RATINGS RATIONALE
The Ba1 rating on Chicago's GO bonds balances the city's considerable strengths, including its massive tax base and healthy liquidity, against its extremely sizable unfunded pension liability. The liabilities drive high and growing fixed costs, which are difficult to afford as reflected in the city's persistent budgetary challenges despite its legal ability and demonstrated willingness to raise revenues. The costs to finance a potentially sizable police union contract could add to budgetary pressures once settled. The rating also considers that Chicago's revenue base is shared with other large governments that also have very high debt and pension burdens.
The Ba1 rating on Chicago's motor fuel tax bonds is capped at the city's Ba1 GO rating because of a lack of legal separation of the pledged revenues from the city's general operations. This constrains the rating despite strong coverage. The rating is also capped at one notch below the rating on the State of Illinois' (Baa2 stable) GO bonds because the pledged revenues are subject to state budgetary appropriation, but the state's rating is not currently a constraint because it is rated two notches higher than the rating on the motor fuel tax revenue bonds.
The Baa2 rating on Chicago's senior lien sewer revenue bonds closely aligns with the rating on the city's GO bonds to reflect the position of the utility as a city department with revenues that flow through the city. The department is governed by the mayor and the city council, who have the authority to establish rates. The exposure of the sewer revenue bonds to the city's credit challenges is the primary factor constraining the rating to Baa2 despite otherwise strong attributes of the system, including adequate debt service coverage, steady investment in capital supported by recent rate increases and ample treatment capacity. The Baa3 rating on junior lien sewer revenue bonds is positioned one notch lower than the rating on the senior lien sewer revenue bonds given the subordination of the pledge.
The Baa2 rating on the city's water revenue bonds closely aligns with the rating on the city's GO bonds to reflect the position of the utility as a city department with revenues that flow through the city. The department is governed by the mayor and the city council, who have the authority to establish rates. The exposure of the water revenue bonds to the city's credit challenges is the primary factor constraining the rating to Baa2 despite otherwise strong attributes of the system including, sound debt service coverage, steady investment in capital supported by recent rate increases, plentiful water supply and a massive service area that extends well beyond the city.
RATING OUTLOOK
The outlook was changed to stable from negative because recovering revenues and a large infusion of federal aid will prevent the city's liquidity position or bonded debt profile from eroding for at least the next two years.
The stable outlooks on the city's motor fuel tax bonds, water revenue bonds and sewer revenue bonds mirror the stable outlook on Chicago's GO bonds because of the linkages among the ratings.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
- GO: Demonstrated ability to match ongoing revenues with ongoing expenses including the accommodation of statutorily required increases in pension contributions
- GO: Moderation of the city's pension burden arising from robust economic and revenue growth or strong pension asset performance
- Motor fuel tax, water and sewer revenue: Upward movement in the rating on Chicago's GO bonds
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
- GO: Widening of structural gap between revenue and expenditures that increases the likelihood that reserves will decline or debt will increase
- GO: Heightened risk of pension systems transitioning to pay-as-you-go funding structure, or material growth in unfunded pension or debt burden
- Motor fuel tax: A downgrade of the ratings on the GO bonds of the city or the State of Illinois
- Motor fuel tax: Very substantial declines in motor fuel tax collections and reduced coverage
- Water and sewer revenue: Significantly narrowed liquidity and debt service coverage, or substantial growth in leverage of net revenue
- Water and sewer revenue: Downgrade of the rating on the city's GO bonds
LEGAL SECURITY
Chicago's GO bonds back by the city's full faith and credit pledge and are payable from all available revenues including a tax levy unlimited as to rate or amount.
Chicago's motor fuel tax revenue bonds are backed by a senior lien on 75% of the city's annual allocation of state motor fuel taxes plus other pledged revenue primarily consisting of licensing fees collected from tour boats operating on the Chicago River.
Outstanding sewer revenue bonds are secured by either a senior lien or second lien on revenue, net of O&M expenses, of Chicago's sewer enterprise.
Outstanding water revenue bonds are backed by a lien on revenue, net of operations and maintenance (O&M) expenses, of Chicago's water enterprise. The bonds that are currently outstanding were originally issued as second lien bonds. However, following a defeasance in 2019 and closing of the senior lien, the bonds now have a priority claim on revenues.
PROFILE
The City of Chicago's estimated population of 2.7 million makes it the third most populous city in the US. City services include public safety, public works and general governmental functions. The city's enterprise operations include water, sewer (collection only) and two major airports.
Chicago's water and sewer systems are business enterprises of the city. The water system treats water from Lake Michigan and distributes it to an estimated 5.3 million people, both within the city and in 125 nearby suburban communities. The sewer system collects and transmits wastewater within a 230 square mile area that primarily encompasses the city itself. Chicago's sewer enterprise does not treat or dispose of wastewater.
METHODOLOGY
The principal methodology used in the general obligation ratings was US Local Government General Obligation Debt published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1260094. The principal methodology used in the special tax ratings was US Public Finance Special Tax Methodology published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1260087. The principal methodology used in the revenue debt ratings was US Municipal Utility Revenue Debt published in October 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1095545. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.
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Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.
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