Chicago Could See Credit Downgrade If Pension Changes Are Suspended Pending Lawsuit

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Unions and retirees are currently challenging Chicago’s 2014 pension changes, and they are asking a judge to stop the implementation of the changes – which took effect Jan. 1 – until the lawsuit is resolved.

But a Chicago official said on Thursday that such an injunction could spur a credit rating downgrade from all three major rating agencies.

From Reuters:

Chief Financial Officer Lois Scott testified in Cook County Circuit Court that all three major credit ratings agencies have negative outlooks on Chicago’s ratings, largely due to a big unfunded pension liability that a 2014 Illinois law aims to ease for the city’s municipal and laborers’ funds.

Labor unions and retirees who are challenging the law, which took effect Jan. 1, have asked Associate Judge Rita Novak to temporarily stop it.

“I think that anything that arrests progress significantly increases our risk of downgrades,” Scott testified.

Scott said Chicago’s ratings are already lower than most big U.S. cities and that further downgrades would pump up interest rates on new fixed-rate bonds and thin the ranks of potential bond buyers and credit providers. She added the termination of interest-rate hedges and letters of credit on existing variable-rate bonds could be triggered, costing Chicago hundreds of millions of dollars.

The 2014 pension changes require city employees to contribute more to the system. The city’s contribution rate was increased, as well. Lastly, the calculation of COLAs is now linked to inflation; previously, the COLA was set at 3 percent annually.

 

Photo by bitsorf via Flickr CC LIcense

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