Chicago Slapped With Credit Downgrade; Moody’s Cites Pension Liabilities As City Flirts With Junk Status


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.


Photo by bitsorf via Flickr CC License

Chicago Prepares For Pension Payment Spike, Creates Account to Set Aside Funds

Rahm Emanuel in Oval Office

Chicago must pay an additional $565 million in payments to its police and fire pension fund by 2016 – a fiscal strain that hasn’t yet been budgeted for.

But the city has now taken a step towards acknowledging the looming payments, by opening up a separate account in which money will be set aside for the pension contributions.

From Crain’s Chicago:

The Emanuel administration will start setting set aside money next year in a newly segregated account for increased pension contributions for municipal employees and laborers who agreed to reforms enacted earlier this year.

The city’s increased contribution from general revenues will be set aside in the new account even though the pension payment isn’t due until 2016, according to an Emanuel spokeswoman. However, increased payments required for its police and fire pensions next year aren’t even in the budget as negotiations continue with union leaders.


While it’s largely symbolic—the city must make the payments with or without a special fund setting them aside—it’s meant to highlight that the reforms are real and going into effect soon, even as the Illinois Supreme Court agreed Dec. 10 to expedite a case testing whether public worker pensions are totally protected by the Illinois Constitution.

While a segregated fund is a responsible thing to do, “it completely ignores the fiscal irresponsibility of not budgeting for police and fire pensions,” said Amanda Kass, research director at the Center for Tax and Budget Accountability in Chicago. “It sets up the potential for a huge fiscal nightmare” when about $565 million in additional payments for next year’s police and fire pension contributions are due in 2016.

Money for the fund will come from sources other than property taxes, including money freed up by an increased surcharge for 911 calls and miscellaneous small budget cuts, the spokeswoman said. Emanuel was forced to back off his original plan to finance the city’s increased contribution with a big hike in property taxes when Gov. Pat Quinn objected.

It was originally thought that a property tax hike would be the go-to method of revenue generation to raise money for the pension payments. But Emanuel has been adamant that property taxes won’t be raised.

Three New Tax Hikes in Chicago As Emanuel Looks For Revenue To Pay Down Pension Debt

Rahm Emanuel Oval Office Barack Obama

Chicago Mayor Rahm Emanuel is leaving no stone unturned in his search for revenue sources that could help pay down the city’s unfunded pension liabilities, which total over $25 billion.

Complicating the search is the upcoming election; Emanuel has said he will not touch property, sales or fuel taxes, all of which are politically unpopular.

In the past year, Emanuel has increased the “telephone tax” and cigarette taxes. This week, he added three more tax hikes to the list. From the Chicago Tribune:

Mayor Rahm Emanuel plans to raise taxes on drivers who park in garages, those who own luxury skyboxes at Chicago stadiums and companies that try to avoid city taxes by making purchases in the suburbs to balance next year’s budget, aides said Monday.

The three tax hikes would net the city $31.4 million as the mayor seeks to close an estimated $297.3 million budget gap without raising property, sales or gas taxes ahead of the Feb. 24 city election, when Emanuel will ask voters to give him a second term.

Under Emanuel’s plan, the tax on parking in public lots would rise 2 percentage points, to 22 percent on weekdays and 20 percent on weekends. The city expects to collect $10 million from the increase in 2015, mayoral spokeswoman Kelley Quinn said.

As part of his first budget, Emanuel added a $2-a-day fee on cars parked in public lots on weekdays. And in 2013, Emanuel pushed through the City Council a switch from a flat parking tax of $5 to a percentage parking tax, which the mayor said would cost more for parkers in “premium” garages like those at hotels but potentially lower costs for people parking in economy garages.

The city estimates it would make $4.4 million by ending a 1995 “amusement tax exemption” on the cost of renting skybox suites at sporting events and concerts.

And the Emanuel administration says $17 million would flow into the city’s coffers next year by closing a loophole in the use tax charged to Chicago businesses that buy certain goods outside the city.

A breakdown of the city’s unfunded pension liabilities by system, from the City of Chicago website (data from 2012):

Municipal Employees’ Annuity & Benefit Fund of Chicago (MEABF): $8.2 billion

Laborers’ & Retirement Board Employees’ Annuity & Benefit Fund (LABF): $0.9 billion

Policemen’s Annuity & Benefit Fund (PABF): $7.0 billion

Firemen’s Annuity & Benefit Fund (FABF): $3.1 billion

Chicago Teachers Pension Fund (CTPF): $7.1 billion

Park Employees Annuity and Benefit Fund (PEABF): $0.4 billion