Credit rating agency Moody’s hit Chicago with a credit downgrade on Friday, cutting the city’s rating to Baa2 – two steps above junk bond status.
Notably, Moody’s indicated that the city could face future downgrades even if its 2014 pension reforms withstand legal challenges.
Pension360 has covered the city’s ballooning pension payments, which could exceed $1.5 billion annually by 2019.
More on the downgrade from Bloomberg:
“The city’s credit quality could weaken as unfunded pension liabilities grow and exert increased pressure on the city’s operating budget,” Moody’s analysts Matthew Butler and Rachel Cortez wrote. “We expect substantial growth in unfunded pension liabilities even if the city’s recent pension reforms survive an ongoing legal challenge.”
Chicago is obligated to pay $600 million into four pension funds in next year’s budget, though Standard & Poor’s said the contribution may be delayed after Feb. 24 elections led to an unexpected runoff vote between Emanuel and Jesus “Chuy” Garcia.
The third-most-populous U.S. city has $20 billion in unfunded pension obligations that it can’t address without the approval of the state legislature. State lawmakers in June restructured two city pension plans with about $9.4 billion in underfunded liabilities for about 60,000 municipal workers and retirees by making them pay more and reducing benefits. The changes didn’t apply to the police and fire systems.
Labor unions in Chicago sued to block the law in December, and the litigation was put on hold pending the outcome of an Illinois Supreme Court ruling on a state pension overhaul.
While Illinois is the lowest-rated state, credit raters differ on Chicago’s standing. S&P grades the city A+, the fifth-highest rank and four levels above Moody’s. Fitch Ratings ranks it two steps higher than Moody’s.
Chicago has the lowest credit rating of any major city in the country, excluding Detroit.
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