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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Moody’s released a report Wednesday outlining the credit agency’s thoughts on CalPERS in the wake of the Stockton ruling.
The agency affirmed CalPERS’ rating of Aa2, which is the third-highest rating available. From the report:
Favorable outcomes for CalPERS in the Stockton, CA and San Bernardino, CA bankruptcy proceedings lend further support to CalPERS improving financial profile because it reduces the likelihood that other CalPERS contracting employers will race to declare bankruptcy to reduce growing pension liabilities. The combination of a reduction in the likelihood that other distressed California municipalities will pursue bankruptcy to reduce pension liabilities and contribution rate increases on contracting employers in each of the last three years should improve the CalPERS funded status and its ability to cover the expected longer lives of retirees.
More from the Sacramento Bee:
Stockton’s court-approved plan to continue full contributions to its CalPERS-administered pension program sets a positive course for the retirement system, Moody’s Investors Service said in a Wednesday morning statement.
The firm’s assessment is the other side of what it said shortly after bankruptcy Judge Christopher Klein’s Oct. 1 non-binding comments that pensions aren’t immune to bankruptcy law. Wall Street applauded his statements and Moody’s said the judge’s remarks signaled that bankruptcy could be a new tool for financially-stressed municipalities.
But now that Klein has blessed Stockton’s plan, which cuts payments to debtors but leaves its contributions to CalPERS untouched, Moody’s says the case “likely sets a precedent that pensions will enjoy better treatment than debt in California (municipal bankruptcy) cases.”
Klein said that rejecting Stockton’s plan would irreparably degrade the city’s core services, including police and fire departments already struggling to hire and retain workers. Moody’s said Klein’s decision was “somewhat of a surprise,” given his earlier comments, and would discourage other contracting employers from using bankruptcy to cut their growing pension liabilities.
CalPERS is the nation’s largest public pension fund.
Photo by Stephen Curtin