Fitch Rates Chicago, IL $570.2MM GOs 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the city of Chicago's (the city) general obligation (GO) bonds as follows:

--$342.3 million series project and refunding series 2008C;

--$59.8 million library series 2008D;

--$168.1 million taxable project and refunding series 2008E.

The bonds are expected to price the week of Dec. 8, 2008, via negotiated sale. Fitch affirms its 'AA' rating on the city's approximately $6.2 billion in outstanding GO bonds, and $290 million in outstanding sales tax revenue refunding bonds. The Rating Outlook is Stable.

The 'AA' rating on the city's GOs reflects its broad economy and tax base, diverse revenue stream, and sound reserves outside of the corporate fund. The Rating Outlook remains Stable, although Fitch notes the city's use of non-recurring funding sources, primarily a portion of proceeds from fixed asset sales and long-term leases, for near and intermediate-term budget relief. Fitch views this temporary budget-balancing solution as acceptable given the large share of asset sale proceeds set aside as reserves.

However, Fitch believes that once sizable non-recurring funding sources are exhausted, management will be challenged to fund its largely inflexible spending requirements. The city's high fixed-cost burden stems from above average debt levels, low pension funding ratios, and uncertain but presumed significant other post-employment benefit liabilities. Important to the city's future credit quality is the ability and willingness to take budgetary action that reduces the reliance on non-recurring sources, rather than further drawing on the reserves. Fitch assumes in its 'AA' rating and Stable Outlook that the perpetual reserves will be maintained; their use could trigger negative rating action.

The city used $500 million from the sale of the Chicago Skyway concession in 2005 to create a reserve, and plans to set aside similarly $400 million from the expected sale of its parking meter concession. The interest on both is transferred to the corporate fund, with the interest on the $400 million expected to replace the approximately $20 million in revenue the city will lose as a result of the parking meter transaction. The reserve's balance equates to a sizable 29% of 2007 spending in the corporate fund, and the corporate fund's balance has been virtually depleted.

In August 2008, city officials identified a potential budget deficit of $141 million in 2008 and another $279 million in 2009, resulting from a combination of weaker than expected revenue (particularly real estate transaction, sales, and income taxes, and land sales) and spending increases. The combined gap for 2008 and 2009 was later revised to $469 million, and officials have acknowledged that the weak economy is likely to lead to reduced revenue levels through at least 2010. Although the city has taken strong steps to reduce spending, including instituting furlough days, eliminating vacancies, and laying off workers, Fitch notes that spending constraints are great given a highly unionized workforce. Revenue enhancements in 2009 should produce some, but not significant, additional recurring resources. Budget solutions therefore rely heavily on non-recurring actions totalling about $350 million, or 5.5% of the two-years' combined expense. Additional concerns about the city's ability to achieve structural budget balance in the near term include the sizable fund balance drawdowns in 2006 and 2007, which were years in which the city saw sound economic growth; and the city's routine bonding out for current pension payments, as increases are generally given out retroactively.

The pending sale of the Midway Airport concession is expected to generate $900 million to be used for capital and infrastructure needs, of which up to one-half can be used for pension contributions. Another $100 million will provide budget relief over the current and upcoming four years. The recently-announced parking meter concession sale is anticipated to generate $1.16 billion, of which $325 will be used for budget relief in the intermediate term. Another $324 million will be set aside in a budget stabilization fund which officials expect to maintain but which may be called upon if the economy continues to weaken. The remainder will be used for budget relief through 2012, including $150 million in 2008 and 2009. While Fitch views negatively any use of proceeds derived from long-term asset leases for near-term budget relief, the planned spending of these sources through 2012 provides the city with time to develop long-term budget measures to better match recurring spending with revenue.

Strong growth in service sectors, including education and health, and professional and business, have offset a decline in manufacturing. Overall metropolitan statistical area (MSA) employment has increased in the last three years, reversing a declining trend earlier this decade. However, the city is experiencing growth in its unemployment rate of a similar magnitude to the nation as a whole; the September 2008 rate was 7.4%, compared to 5.8% in September 2007. Resident employment declined by 1.7% in that period.

Debt levels are above average but in the moderate range, although Fitch believes the city's overall fixed cost burden is a constraint, including the needs of the city's four pension plans; two have funding ratios of only about 50%, and another is below 70%. Proceeds of a portion of the series 2008C and E bonds will be used to restructure debt service for $60 million in budget relief in 2008 and 2009. Officials estimate the city's liability for other post-retirement benefits at $1.3 billion, but this figure will need to be refined. The city's settlement with its retired employees to pay a portion of the city's defined benefit healthcare plan, which expires June 30, 2013, and any additional liability will be determined after that time.

Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework'.) At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions, and plans to revisit the recalibration in the first quarter of 2009.

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