* The RTA wasn’t the only transit entity hit with a Moody’s downgrade yesterday. From Moody’s…

Late yesterday, Moody’s downgraded the Chicago Transit Authority (CTA)’s Sales Tax Receipts Revenue Bonds two notches from A1 to A3, and assigned a negative outlook. Also affected by this action are Series 2006 Building Refunding Revenue Bonds issued through the Public Building Commission of Chicago to refinance CTA’s headquarters, with $67 million outstanding; the rating on these bonds was lowered to Baa1 from A2. The negative outlook connotes continued downward pressure on the rating and the possibility of another downgrade in the next 12-24 months.

The downgrades are driven primarily by the authority’s exposure to the State of Illinois, which was downgraded to Baa3 from Baa2 on June 1, amid an extended political impasse in the Illinois General Assembly over how to balance the state’s budget. After two years of failing to reach an agreement, and operating with substantial budget deficits, the state has allowed a backlog of payments owed to CTA and other public- and private-sector entities to rise to record levels ($14.68 billion in aggregate as of June 5, according to the state comptroller). This prolonged impasse is putting pressure on various entities like CTA that are awaiting payment from the state.

The State of Illinois also collects regional sales taxes that support CTA and other Chicago-area transit providers, and it also provides other forms of supplemental funding. Like the state itself, CTA faces a worsening pension funding burden. Failure to make required annual pension contributions could jeopardize the flow of funds to holders of some of the authority’s debt, although to date CTA has made all required contributions.

* From the report…

Credit Challenges

» Economic and financial pressure caused by state and local governments’ overlapping pension liabilities, which will limit the ability to increase revenues for capital or operating needs
» Exposure to credit deterioration of related governments including the state and Chicago
» State aid payment deferrals and absence of state plan to address backlog of unpaid bills
» Backlog of capital investment needs and large unfunded authority pension liabilities

Rating Outlook

The negative outlook incorporates the state’s continuing credit deterioration, which threatens to exacerbate ongoing aid payment delays in coming months, barring an agreement to compensate for the state’s recent revenue losses. It also factors in the Chicago area’s economic vulnerability to tax increases needed to address pension liabilities, which could undermine regional sales tax revenues at a time when regional transit providers are trying to address deferred capital investment needs.

Factors that Could Lead to an Upgrade

» Stabilization of related governments’ credit positions
» Sustained trend of improving debt service coverage
» Pledge of new or increased revenues
» More stringent legal protections for bondholders

Factors that Could Lead to a Downgrade

» Substantial shortfalls in pledged sales tax revenues caused by economic conditions or other factors
» Prolonged decline in debt-service coverage, whether from increased borrowing or revenue underperformance