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Moody's downgrades State of Illinois' $27 billion of General Obligation Bonds to A3 from A2
Global Credit Research - 06 Jun 2013
Negative outlook maintained; related debt ratings also lowered, affecting $32 billion in total
New York, June 06, 2013 -- Moody's Investors Service has downgraded the State of Illinois' $27 billion of outstanding general obligation bonds to A3 from A2 and maintained the state's negative outlook. As a consequence of this action, we have also downgraded by a notch the ratings on related credits, which currently have about $5 billion in outstanding debt.
SUMMARY RATING RATIONALE
The Illinois General Assembly on May 31 concluded its session without addressing the severe pension liabilities that are the state's greatest credit challenge. Our rating now assumes the government will not take action to reduce the state's pension liabilities any time soon. The legislature's political paralysis to date shows not only the magnitude of Illinois' unfunded benefit liabilities, but also the legal and political hurdles to legislation that would make pensions more manageable long term. Without significant reforms, substantial growth in both unfunded liabilities and in annual funding burden are likely in coming years. This trend may coincide with the expiration of most of the income tax increases the state imposed in fiscal 2011 to help cover pension costs. As a consequence, its payment backlog will likely remain large, despite some recent signs of improvement. An A3 rating, while very low for a US state, is consistent with the General Assembly's inability to steer the state from a path to fiscal distress. Illinois still has a diverse and large economic base, with above-average wealth levels.
--Sovereign powers over revenue and spending
--Statutory provisions giving priority to debt service over other state expenditures
--Large, diverse, and wealthy economy
--Severe pension funding shortfall
--Chronic use of payment deferrals to manage operating fund cash
--Long-term weak management practices reflected in pension under-funding and bill payment delays
The negative outlook reflects our expectation that Illinois' pension liabilities will continue to grow, in the absence of substantive reform efforts, and that annual funding requirements will become unmanageable, particularly if no steps are taken to address the loss of revenue from expiring income tax increases in 2015." [Continue reading at Moodys.com]
Moody's then downgraded the City of Chicago's motor fuel tax debt because "the state has the authority to reduce pledged revenues." A bunch of municipalities rely on the state for aid as well. So distressed municipalities with small tax bases could have a problem if state aid dries up.
Moody's downgrades to Baa1 the rating on the City of Chicago's (IL) motor fuel tax debt; outlook remains negative
Global Credit Research - 07 Jun 2013
Baa1 rating with negative outlook applies to $271.2 million of rated motor fuel tax debt
New York, June 07, 2013 -- Moody's Investors Service has downgraded to Baa1 from A3 the rating on the City of Chicago's (IL) motor fuel tax debt. The outlook remains negative. The Baa1 rating and negative outlook applies to $271.2 million of motor fuel tax revenue debt, including two series of debt that have not yet been issued: The Motor Fuel Tax Revenue TIFIA Bond (Wacker Drive Reconstruction Project - Including The Chicago Riverwalk Expansion: TIFIA 2013-1004A), which we rated on May 24, 2013, and the Motor Fuel Tax Revenue Refunding Bonds, Series 2013, which we rated on April 16, 2013.
SUMMARY RATING RATIONALE
The downgrade of Chicago's motor fuel tax rating to Baa1 from A3 reflects the recent downgrade of the State of Illinois's general obligation rating to A3 from A2. With legislative approval, the state has the authority to reduce pledged revenues by reducing motor fuel tax rates, increasing appropriations for various state purposes from gross motor fuel tax revenues, or reducing the allocation of remaining motor fuel tax revenues to municipalities. The state's ability to alter pledged revenues presents the risk of non-appropriation. Reflecting this risk, Chicago's motor fuel tax rating is capped at a rating level below the state's general obligation rating. The State of Illinois's general obligation credit profile is most recently discussed in our rating report dated June 6, 2013.
The Baa1 rating on the City of Chicago's motor fuel tax debt also reflects the state's large and diverse economic base from which the pledged motor fuel tax revenues are generated; still sound debt service coverage despite recent declines; an additional bonds test (ABT) that should preclude overleveraging of pledged revenues; a flow of funds that provides for the monthly set aside of pledged revenues with the trustee (Amalgamated Bank); and the conservative structure of the city's motor fuel tax debt, which carries no exposure to the risks associated with variable rate debt or interest rate swaps. These positive credit attributes are balanced against significant pressures, namely steady declines in gross motor fuel tax revenues, which reflect the broader economic downturn, increased fuel prices, and increased use of fuel efficient vehicles, all of which have contributed to a decline in fuel consumption. Another credit challenge stems from the City of Chicago's (general obligation rated Aa3/rating under review for possible downgrade) declining population relative to that of other incorporated Illinois municipalities; this trend factors unfavorably into the statutory formula used to allocate motor fuel tax revenues to Chicago.
The negative outlook on Chicago's motor fuel tax debt reflects the negative outlook on the state's general obligation debt. The outlook also incorporates the steady declines in pledged motor fuel tax revenues and debt service coverage; both trends may continue for the foreseeable future. [Continue reading at Moodys.com].
Here is Governor Quinn's statement on the downgrades via Illinois.gov.
"FOR IMMEDIATE RELEASE
June 6, 2013
Governor Quinn Statement on Moody's Downgrade
Legislators to Return to Springfield on June 19th
CHICAGO - Governor Pat Quinn issued the below statement regarding Moody's downgrade from A2 to A3, the second time Illinois' credit rating has been downgraded this week.
"Here we go again.
"Will two downgrades in one week be enough to convince the General Assembly that our pension crisis can't be ignored anymore?
"Time and time again over the past two years, I have proposed, asked and pushed members of the General Assembly to send me a comprehensive pension reform bill.
“Time and time again, failure to act by deadlines has resulted in the bond rating agencies lowering our credit rating, which hurts our economy, wastes taxpayer money and shortchanges the education of our children.
"Illinois taxpayers are paying a price of $17 million a day for the General Assembly’s lack of action on comprehensive pension reform.
"In its downgrade statement, Moody's said this: 'An A3 rating, while very low for a U.S. state, is consistent with the General Assembly’s inability to steer the state from a path to fiscal distress.'
"Legislators and their leaders know what they need to do to return Illinois to sound financial footing.
"I've contacted the Senate President, the Speaker's office, and both Republican leaders today about this emergency.
“I am calling the General Assembly back to Springfield on June 19th to finish their job for the people of Illinois.”