NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'AA-' rating to the following Chicago, Illinois bonds:
--$170.5 million general obligation (ULTGO) bonds, project series 2012A;
--$111.9 million ULTGO bonds, taxable project series 2012B;
--95.2 million ULTGO bonds, refunding series 2012C; and
--$163.3 million ULTGO bonds, taxable refunding series 2012D.
The bonds are expected to be sold via negotiation the week of May 7.
In addition, Fitch affirms the following ratings on Chicago's outstanding debt rated by Fitch:
--$8 billion ULTGO bonds at 'AA-';
--$70.4 million taxable limited tax general obligation (LTGO) notes, series 2011;
--$617.7 million sales tax bonds at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The ULTGO bonds are secured by the city's full faith and credit and its ad valorem tax, without limitation as to rate or amount.
The LTGO notes are secured by the city's full faith and credit and its ad valorem tax, subject to limitation.
The sales tax bonds are secured by a first lien on the city's 1.25% home rule sales and use tax and the city's local share of state distributed 6.25% sales and use tax. Additionally, there is a springing debt service reserve, funded over a 12-month period, that is triggered if coverage falls below 2.5x.
KEY RATING DRIVERS
RETIREMENT BENEFIT RISKS: Fitch views positively concerted efforts towards pension reform but is concerned about the current magnitude of the unfunded liability, the large impending annual pension contributions (APC) increases, and the potential legal and policy hurdles to achieving meaningful pension reform.
BUDGET IMBALANCE BEING ADDRESSED: Management has been highly focused on eliminating both non-recurring funding sources and inefficiencies to address chronic budget imbalances, and, towards that goal, projects ending 2012 without use of any strategic reserves.
MIXED ECONOMIC PICTURE: Chicago serves as the economic and cultural hub for the Midwest region, and maintains good prospects for long-term stability if not growth. However, socioeconomic indicators are mixed with elevated unemployment and individual poverty rates, below average per capita income levels, but superior educational attainment numbers.
SOLID RESERVES REMAIN: Despite use of substantial available reserves to fund budget gaps over the past three years, the city retains significant strategic reserves ($634 million), and furthermore, plans to add a modest $20 million to its parking meter reserve in 2012.
SIZABLE DEBT BURDEN: Debt levels are above average, in part because the city bond finances retroactive salary and related pension payments, in addition to capital needs. Fitch believes the debt burden will remain above average given recent tax base erosion, increasing debt service, and capital needs of overlapping municipal entities.
NOTABLE REVENUE BOND COVERAGE: Sales tax revenues cover maximum annual debt service (MADS) in excess of 13 times (x), and coverage is protected against dilution with a 5x MADS additional bonds test. However, since sales tax revenues may be subject to disruption in a bankruptcy and in conformance with Fitch Ratings' rating criteria, the sales tax bonds can be rated no higher than the city's general obligation rating.
WHAT COULD TRIGGER A RATINGS ACTION
ABSENCE OF PENSION REFORM: The city's inability to meaningfully address its pension challenges either through pension reform and/or identification of enhanced revenues would negatively affect the rating.
CREDIT PROFILE
Chicago has a broad, diverse economy that experienced significant recessionary weakness, from which the city is slowly recovering. The overall economic softness affected financial operations, as several of the city's varied revenue sources underperformed expectations without commensurate budget-balancing actions. Historically, revenue shortfalls were offset primarily with nonrecurring funding sources, including reserves resulting from proceeds of long-term asset leases, and only modest adjustments to spending.
New management, which took office in May 2011, has demonstrated a willingness to take potentially unpopular actions to achieve structural balance. Fitch views these pecuniary actions favorably, while believing the city's continued ability to implement systemic change will require sustained compromise from those affected by the changes, particularly from the city's unionized workforce.
FINANCIAL OPERATIONS
The city ended 2010 with an operating surplus and an unreserved general fund balance of 2.7% of spending, an improvement from the past few years. The surplus was the result of both revenues exceeding budget and expenditures coming in below expectations. However, the positive fund balance position relied on $458 million in strategic asset reserves, which equaled about 15% of total funding sources. Despite the sizable draw on reserves, when including remaining strategic asset reserves (primarily Chicago Skyway lease proceeds), the 2010 ending unreserved general fund balance totaled 30.5% of spending.
2011 marked the third consecutive year of fiscal imbalance that was again stabilized with $288 million in strategic reserves, which equaled roughly 9% of budgeted revenue. At 2011 year end on an unaudited basis, the strategic reserve balance totaled $634 million or 35% of the $1.8 billion balance at the beginning of 2009. Prospectively, city officials have stated strategic reserves will not be used to address any structural imbalance, but instead will be rectified with structural solutions.
The 2012 budget, which passed with unanimous council approval for only the third time in 35 years, closed a $636 million gap with over $525 million in recurring actions garnered primarily through increased efficiencies and also limited use of one-time revenue sources. The budget is 5.1% below the 2011 budget, and does not increase sales, fuel or property tax rates. Structural efficiencies include competitive bidding for several city services (custodial, tree trimming, street marking), reorganizing and consolidating public safety departments, reconfiguring trash collection and instituting a wellness initiative. These changes resulted in 517 layoffs and the elimination of 2,100 vacant positions, which resulted in $150 million in payroll savings.
Targeted revenue increases for 2012 included eliminating certain fee waivers, increasing fines, raising the hotel tax, and improving revenue collections. Additionally, the budget employed $88 million in debt restructuring and other financing initiatives, but otherwise limited nonrecurring funding sources. Positively, the budget also anticipates contributing $20 million back to the strategic reserve.
LONG-TERM LIABILITIES
The size and direction of long-term liabilities is a significant rating concern. Three of the city's four pension plans are less than 50% funded as of Dec. 31, 2010, using Fitch's 7% discount rate assumption. In aggregate the unfunded liability equals a high 5.2% of market value. Historically the city was required to make pension contributions based on a multiple of payroll, and although the city fully funded its annual required payment, the amount was less than one-half the actuarially required contribution (ARC). However, state legislation enacted in January 2011 reduces benefits for new hires but also requires the two public safety plans to be 90% funded by 2040. The city calculates this enhanced funding requirement will require a $714 million increase annually beginning in 2015, more than doubling the current contribution for all four plans.
The city is working toward pension reform both to address the weak funded ratio and to ameliorate the troubling pension payment increase beginning in 2015. Fitch views positively management's attention on this critical issue but believes that reform of this magnitude may be difficult to achieve. Furthermore, certain conditions to achieve meaningful pension reform are outside the city's control and will need to be addressed at the state level. Adding to the opaque benefits picture, the city may have a liability for post-employment benefits beyond the expiration of a current settlement agreement on June 30, 2013.
Overall debt ratios are high at 6.4% of market value or $6,613 per capita. In addition to funding capital, the city has bonded for retroactive salary and related pension settlement payments. Management expects to discontinue the latter practice, a move that Fitch views positively. Debt amortization is below average at 36% in ten years, and MADS, which occurs in 2021, as a percentage of current general fund spending accounts for an above average 19%. The combination of ongoing capital needs coupled with declining market values will keep the debt ratios elevated for at least the intermediate term.
SALES TAX COVERAGE
Debt service coverage on the sales tax revenue bonds is expected to remain exceptional and well-protected by the restrictive additional bonds test that requires 5.0x coverage. The high coverage level somewhat offsets Fitch's concerns about the exposure of potential swap termination payments or variable rate fluctuations (fixed-to-floating) if swaptions are exercised.
A small portion of pledge revenue from the state's local share sales tax is subject to annual appropriation by the state. Since this portion has historically been less than 10% of pledged revenue Fitch does not believe a delay in or failure to appropriate would result in a significant impairment credit quality. Indenture provisions include a covenant by the city to take any legal action to insure that pledged sales taxes produce coverage of at least 1.0x of all senior and any subordinate debt service. However, current debt service coverage levels and the stringent additional bonds test make the implementation of the potentially contentious tax increase indenture provision unlikely.
ECONOMY
Chicago serves as the economic and cultural hub for the Midwest region, and maintains good prospects for long-term stability if not growth. The city gained over 30,000 jobs in 2011 primarily in professional and business services despite reductions in both manufacturing and public service. Chicago's population totaled 2.7 million in 2011, down 7% from the 2000 census, but still accounts for 21% of the state's entire population.
Socioeconomic indicators are mixed with elevated unemployment and individual poverty rates, slightly below average per capita income levels, but superior educational attainment numbers. The city draws highly skilled labor from outside the city limits, who clearly contribute to the employment base and overall economic activity. As of February 2012, the city's unemployment rate (9.8%) was still above the state and national averages despite a 3.5% reduction in the labor force compared to the same period a year prior.
Fitch Ratings has withdrawn its ratings on the following bonds due to prerefunding activity:
--Chicago (IL) (Neighborhoods Alive 21 Prog) general obligation bonds series 2002A (all maturities);
--Chicago (IL) (Neighborhoods Alive 21 Prog) general obligation bonds series 2003C (refunded with new CUSIPs assigned);
--Chicago (IL) general obligation bonds series 2001A (refunded with new CUSIPs assigned);
--Chicago (IL) general obligation direct access bonds series 2005-1A (refunded with new CUSIPs assigned);
--Chicago (IL) general obligation direct access bonds series 2005-1B (prerefunded maturities only);
--Chicago (IL) general obligation direct access bonds series 2005-2A (prerefunded maturities only);
--Chicago (IL) general obligation direct access bonds series 2005-2B (prerefunded maturities only);
--Chicago (IL) general obligation direct access bonds series 2005-3B (prerefunded maturities only);
--Chicago (IL) general obligation direct access bonds series 2005-3C (prerefunded maturities only);
--Chicago (IL) general obligation direct access bonds series 2005-3D (prerefunded maturities only);
--Chicago (IL) general obligation direct access bonds series 2006-1A (prerefunded maturities only);
--Chicago (IL) general obligation direct access bonds series 2006-1B (prerefunded maturities only);
--Chicago (IL) general obligation direct access bonds series 2006-1C (prerefunded maturities only);
--Chicago (IL) general obligation direct access bonds series 2006-1D (prerefunded maturities only);
--Chicago (IL) general obligation project & refunding bonds series 2002A (refunded with new CUSIPs assigned);
--Chicago (IL) general obligation project & refunding bonds series 2004A (refunded with new CUSIPs assigned);
--Chicago (IL) general obligation project & refunding bonds series 2005B (refunded with new CUSIPs assigned);
--Chicago (IL) general obligation project & refunding bonds series 2006A (refunded with new CUSIPs assigned);
--Chicago (IL) general obligation project & refunding bonds series 2007A (refunded with new CUSIPs assigned);
--Chicago (IL) general obligation project bonds series 2003C (refunded with new CUSIPs assigned);
--Chicago (IL) general obligation refunding bonds series 1998 (refunded with new CUSIPs assigned);
The updated rating history for the above bonds is now reflected on Fitch's web site at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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