OREANDA-NEWS. S&P Global Ratings lowered its rating two notches to 'A+' from 'AA' on Cook County Community College District (CCD) No. 508 (City Colleges of Chicago), Ill.'s outstanding general obligation (GO) bonds. The outlook is negative.

"The downgrade reflects the weakened unrestricted net assets and use of reserves in fiscal 2015 and likely use of combined general fund reserves after reduced state revenue in fiscal 2016," said S&P Global Ratings credit analyst Blake Yocom, "coupled with the potential risks should the state fail to adopt a fiscal 2017 state budget and no additional funds are appropriated for CCDs." In our opinion, a lack of additional appropriations for fiscal 2017 could weaken the district's financial position and cause potential liquidity concerns by the end of fiscal 2017.

"Additionally, the rating action reflects our view of the potential effects on the district's tax base due to the combined pension liabilities and debt of the overlapping governmental entities," added Mr. Yocom.

The outstanding series 2013 bonds are secured by the district's unlimited ad valorem tax GO pledge. The bonds are also alternate revenue source bonds payable from tuition and fees, state grants, and other pledged revenues. They are also secured by unlimited ad valorem property taxes to the extent that pledged revenues are insufficient. Under the bond resolution and trust indenture, City Colleges will abate the annual tax levy only to the extent that pledged revenues are on deposit in the pledged revenues account to pay debt service.

The rating is based on the unlimited-tax GO pledge, which we view as the stronger security.

City Colleges operates seven community colleges in the city, serving a population of 2.7 million in boundaries coterminous with Chicago.

"The negative outlook reflects the at least one-in-three chance that we could lower the rating within the one-year timeframe of the outlook," added Mr. Yocom. It further reflects our view of the weakening financial situation in Illinois and the fact that the lack of additional state appropriations could weaken the district's reserves and liquidity position. We could revise the outlook to stable after receipt of regular state operating appropriations for fiscal 2017 that prove sustainable, coupled with a proactive management response leading to stabilized operations and reserves.

We could lower the rating during the one-year outlook period should the district continue to experience significant reductions or delays in state operating appropriations that meaningfully weaken operations and available reserves. We would likely lower the rating if the district weakens its reserves with no immediate replenishment mechanism after a trend of negative financial operations, leading to potential liquidity concerns, in our view. Additionally, the rating could be pressured given the potential effects on the district's tax base due to the combined pension liabilities and debt of the overlapping governmental entities.