CHICAGO - The Illinois budget stalemate has left Chicago on the hook to cover monthly payments to the trustee on its motor fuel tax bonds because state transfers are trapped without a fiscal 2016 budget in place.
Pending legislation would allow the state to distribute the motor fuel revenues without a budget, but its fate is uncertain.
Chicago is tapping residual revenues it collects and pledges to bond repayments in order to cover monthly payments on $270 million of outstanding bonds.
Once those funds are exhausted, the city intends to look elsewhere for revenue to avoid a default, according to city finance officials. Biannual debt service payments to holders are made in January and July.
Fitch Ratings highlighted the city’s situation in a new report. "The city has sufficient excess receipts on hand to cover the required monthly deposits through October," said Fitch analyst Arlene Bohner. "Should the revenues not be flowing by November, the city has indicated a willingness to use other funds for monthly deposits."
Fitch affirmed its rating of BBB-plus with a negative outlook Tuesday. Its rating on the fuel tax bonds is capped at one notch below the state government's due to the appropriation risk.
The state Senate in early September passed a bill that would allow the motor fuel distribution appropriations to resume without a state budget in placed.
The bill was not called up in the House during its session last week because it lacked the votes.
The House does not return until Oct. 20 and even then if the bill passes it faces a likely veto.
The appropriation provisions are included in a $3.9 billion package - Senate Bill 2046 -- primarily aimed at funding human services programs.
It was approved with Democratic support in the Senate on Sept. 9. Republicans oppose it and Republican Gov. Bruce Rauner sent House members a memorandum last week informing them that "should SB 2046 as amended reach the governor's desk, he would veto it" because it promotes an unbalanced budget.
The fiscal year began July 1.
The bill would permit all planned motor fuel distributions to municipalities, counties, and road districts in the new fiscal year.
The offering statement on the city's last motor fuel sale in June 2014 made clear in bold print the need for a state appropriation.
The situation resembles in some ways one faced recently by the Metropolitan Pier and Exposition Authority; state sales and tourism taxes in a project fund pledged to repay the authority's bonds could not be transferred to the trustee without an appropriation, triggering a technical default when the authority missed a monthly payment in July. The issue has since been remedied with legislation freeing up revenues for transfer.
The failed transfer in the absence of an appropriation prompted Fitch and Standard & Poor's to strip the MetPier bonds of their high-grade double-A to triple-A ratings. They are now capped at one level below the state - which is rated A-minus by the two - to reflect the risk. Moody's Investors Service's Baa1 rating already reflected appropriation risk.
The crucial difference between MetPier and the fuel tax credit is that Chicago is allowed to make transfers to the trustee even without the motor fuel tax revenue in hand, while the MPEA was barred from doing so under its legal structure.
Moody's ties the motor fuel bonds rating to the city's due to lack of a legal segregation of pledged revenues from the city's general operations, and so downgraded them to junk-level Ba1 in May along with Chicago's general obligation rating.
The motor fuel bonds enjoy a much stronger AA-plus rating from Standard & Poor's. The rating agency in its most recent report in June said the rating reflects the pledged revenue stream's diverse statewide base and the insulation of pledged revenues from the financial challenges facing the state of Illinois as the governing statute does not allow tax revenues to be used to support the state's general operations. The bonds also enjoy strong coverage ratios.
The report said while "MFT revenues are subject to state appropriation, the state historically has never been late in disseminating the MFT revenues," Standard & Poor's wrote.
The bonds' strong legal provisions, which include a first-lien pledge and direct deposits with the trustee, also support the bond structure.
The primary source of bond repayment comes from the city's share of the state's tax of 19 cents per gallon of motor fuel sold and an additional 2.5 cent surcharge on diesel fuel.
The city's "residual" revenues used to cover monthly deposits in the absence of the state appropriation have come from sources pledged by the city to supplement the motor fuel credit when the city entered into a Transportation Infrastructure Finance and Innovation Act loan in 2013. The loan is tied to the city's downtown Riverwalk project.
The additional sources include licensing docks for tour boat operations; private and charter boat docking fees; outdoor kiosk advertising; naming rights; special event income, and concession sales of food, beverages, and other goods and services.
The city began collecting those additional revenues in March 2013 and collected $2.2 million in 2014 and $1.6 million during the first half of 2015, according to the June Standard & Poor's report.
On a statewide basis, gross MFT revenues totaled $1.18 billion in 2013. Chicago's annual receipts of MFT revenues are based on its population relative to the population of all incorporated municipalities in Illinois with its share in 2013 being 24.2%.
Maximum annual debt service is about $16 million and peaks at nearly $20 million in 2038. The city reported $50.1 million of MFT revenues in 2014 which provided 2.5 times MADS coverage and 3.34 times annual debt service coverage.
The city sees a two month lag in its receipt of tax revenue which goes directly to the bond trustee. The trustee then sets aside one-fifth of the next interest payment and one-eleventh of the next principal payment on the bonds each month before releasing the rest to the city.
