Fitch Ratings assigns an 'AA' rating to the following city of Chicago, Illinois' general obligation (GO) bonds:
--Approximately $419.5 million project and refunding bonds, series 2009A;
--Approximately $114.3 million taxable project and refunding bonds, series 2009B;
--Approximately $114.8 million taxable project bonds, series 2009C (Build America Bonds - Direct Payment);
--Approximately $133.2 million taxable project bonds, series 2009D (Recovery Zone Economic Development Bonds - Direct Payment).
The bonds are expected to sell via negotiation on or about Jan. 12.
In addition, Fitch affirms the 'AA' rating on the city's $6.5 billion of outstanding GO bonds.
The Rating Outlook is Negative.
RATING RATIONALE:
--The 'AA' rating reflects the city's broad economy and tax base, diverse revenue stream and sound albeit reduced reserves outside of the corporate fund.
--The Negative Outlook is based on the large and growing structural imbalance in the city's operating funds, which has led to the accelerated use of long term reserves and use of other non-recurring funding sources.
--The Negative Outlook also reflects the weakening of the city's economy, including persistently high unemployment rates and a pressured housing market. While the economy remains diverse, the city has a high degree of exposure to subprime mortgage risk and foreclosures significantly exceed the national average.
--The city's debt load is significant, and long term liabilities of both pension funds and retiree health care benefits are sizeable and growing.
WHAT COULD TRIGGER A DOWNGRADE:
--Further acceleration of, and reliance on, the use of long term financial reserves to balance operations.
--Failure to make progress on eliminating the very large gap between current revenues and spending for operations.
--Continued weakening of local economic conditions.
SECURITY:
The bonds are secured by the city's full faith and credit pledge.
CREDIT SUMMARY:
The city continues to experience prolonged economic and financial pressure. After identifying a $520 million budget gap for 2010, the city's approved 2010 budget solutions are mainly non-recurring and include the accelerated use of medium and long term reserves totaling $350 million; restructuring of $118 million in annual debt service, which will significantly extend the average life of the refunded bonds, some to 2040; $44 million in personnel and non-personnel spending reductions; and $8 million from the closure of several tax increment financing districts. The budget assumes a degree of stabilization of economic and financial conditions in 2010; although sales taxes declined an estimated 11% in fiscal 2009, the 2010 budget incorporates a further sales tax decline of just 5%, which could prove optimistic should regional sales tax recovery lag the nation. As 2009 revenues underperformed the 2009 budget by $365 million, Fitch believes that 2010 may be vulnerable to continued revenue erosion even beyond budgeted expectations, particularly in sales and income tax receipts; the city expects property tax collections will remain relatively stable. While the city has taken 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. 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 high fixed-cost burden, stemming from above average debt levels, low pension funding ratios, and uncertain but presumed significant other post-employment benefit liabilities.
By the close of 2010, the city projects it will maintain about $730 million in long-term reserves, a reduction from the $900 million available at the close of 2009. The city's corporate fund balance is nil, down significantly from prior years; however, corporate fund balances must be programmed in the succeeding year's budget, while long term reserves do not. Available reserves outside the corporate fund are expected to equal about 23% of the corporate fund budget. Fitch will monitor the use of reserves, as maintenance of adequate fiscal balances is a key credit consideration. As the 2010 structural gap between available revenues and spending is about $460 million or 15% of corporate fund spending, Fitch believes the city will be quite challenged to balance its budget in the intermediate term without reliance on one time measures. Nonetheless, 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.
Economically, the city continues to have significant challenges in the housing market as the rate of foreclosures continued to rise through late 2009 and housing starts plummeted. Persistent job loss in the financial services, construction, and manufacturing industries drove the city's October 2009 unemployment rate to 11.6%, well over the national average. Fitch expects economic recovery in the city may lag that of the nation. Without economic and financial stabilization, the city's rating may suffer.
Debt levels are above average but in the moderate range, as the tax base has expanded in recent years. Fitch believes the city's overall fixed cost burden is a constraint, including the needs of the city's four pension plans. Although a blue ribbon panel has been convened to offer a strategy for pension funding, police and fire pension funding ratios are currently both well below 50%. Officials estimate the city's liability for other post-retirement benefits at $1.1 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 expires June 30, 2013, and any additional liability will be determined after that time.
About $500 million of the current issuance will restructure existing debt service, a one-time move designed to give the city $118 million in immediate budget relief. The resulting debt service schedule substantially lengthens a sizeable portion of existing debt, slowing the city's overall GO debt repayment.
Applicable criteria available on Fitch's website at www.fitchratings.com:
--'Tax-Supported Rating Criteria,' dated Dec. 21, 2009.
--'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009.
Considerations for Taxable/Build America Bonds Investors:
The following sector credit profile is provided as background for investors new to the municipal market.
The unlimited taxing power of most local government general obligation pledges is the broadest security a U.S. local government can provide to the repayment of its long-term borrowing, and therefore is the best indicator of its overall credit quality. The average local government general obligation rating is 'AA-' with approximately 56% rated at or above 'AA-' and 7% rated 'BBB+' or below. The relatively high ratings reflect local governments' inherent strengths: the authority to levy property taxes, nonpayment of which can result in property foreclosures; additional taxing power that can include sales, utility, and income taxes; and essentiality of and lack of competition for services provided by local governments. Those with low investment-grade or below-investment-grade ratings generally have a combination of a limited or highly volatile economic base, high levels of long-term liabilities including debt and post-employment benefits, and/or unusually limited financial flexibility.
Additional information is available at www.fitchratings.com.
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Contacts:
Fitch Ratings
Melanie A.J. Shaker, 312-368-3143, Chicago
Ann
Flynn, 212-908-9152, New York
or
Media Relations:
Cindy
Stoller, 212-908-0526, New York
Email: cindy.stoller@fitchratings.com