Fitch downgrades Chicago, cites Illinois Supreme Court ruling on pension reform

The city’s rating from Fitch is now just one notch above junk status.

Fitch Ratings downgraded the city of Chicago’s credit rating two notches on March 28, to BBB- from BBB+. The city’s rating from Fitch is now just one notch above junk status. Moody’s already lowered Chicago’s rating to junk status last year.

Fitch attributed the downgrade to the March 24 Illinois Supreme Court ruling that struck down Chicago’s attempted reform of its municipal workers’ and laborers’ pension systems, which Fitch called “among the worst of the possible outcomes for the city’s credit quality.”

Fitch’s comments align with a November 2015 report from Moody’s. That report showed taxpayer contributions to Chicago’s city-run pension systems are going to rise significantly over the next 15 years and that the long-term government-worker pension situation will remain a significant cause for concern and a threat to the city’s credit-worthiness.

Fitch also assigned a negative outlook to their rating, which means they expect to downgrade Chicago again soon unless “the city presents a realistic plan that puts the pension funds on an affordable path toward solvency.”

That plan, according to the ratings agency, must rely on the city’s ability to increase revenues and control spending.

But more tax hikes, like last year’s record $700 million property tax-hike, aren’t the answer to Chicago’s financial woes.

Residents are already fleeing the Chicago area – raising taxes further will only accelerate that outmigration.

Instead of passing massive tax hikes that only serve to burden residents, enacting massive borrowing and expecting bailouts from Springfield, it’s time Chicago focused on passing real reforms that can help fix its pension crisis in the long run.

Positive reforms for the city include moving all new city employees into 401(k)-style plans, offering optional 401(k)-style plans to current workers and freezing city-employee salaries to shrink the growth in accrued pension benefits.

In addition, Chicago should end teacher pension “pickups” – under which Chicago Public Schools pays for a majority of its teachers’ required employee pension contributions as a special benefit.

And if all these reforms ultimately prove unsuccessful in slowing the growth of Chicago’s government-worker pension liabilities, the city should be given the option to declare bankruptcy.