Moody’s hits Chicago with credit downgrade, cites pensions

Moody’s hits Chicago with credit downgrade, cites pensions

Chicago’s credit rating trails only Detroit among major U.S. cities.

Moody’s Investors Service has downgraded Chicago’s credit rating to Baa2 from Baa1, and maintained a negative outlook. The affected debt includes the city’s $8.3 billion in general obligation debt, $542 million in sales-tax debt and $268 million in motor-fuel tax debt.

Chicago debt now stands a mere two notches above junk-bond status.

Moody’s attributed the downgrade to “expected growth in Chicago’s already highly elevated unfunded pension liabilities and continued growth in costs to service those liabilities, even if recent pension reforms proceed and are not overturned in legal appeal.”

The agency maintained its negative outlook due to the “expectation that the city’s credit quality could weaken as unfunded pension liabilities grow and exert increased pressure on the city’s operating budget.”

Moody’s also warned that “regardless of the outcome of legal challenges to pension reform … we expect Chicago’s unfunded pension liabilities – and the costs of servicing those liabilities – to continue to grow, placing significant strain on the city’s financial operations …”

Earlier this week, Fitch Ratings affirmed its A- credit rating for nearly $9 billion of Chicago’s bonded debt. The agency noted that absent pension reform, the city will likely face another downgrade. From the report:

“The ‘A-‘ rating and Negative Outlook reflect the lack of decisive solutions to both the near- and long-term burdens associated with the city’s severely underfunded pension plans … Fitch believes implementation of pension solutions that move all of the city pension plans towards a clear path towards adequate funding while preserving sustainable budgetary balance is necessary to stabilize the credit. Absent that, the rating is likely to be downgraded.”

Chicago’s credit rating has little chance of improving without bold reforms to the city’s pension systems, such as moving current workers to 401(k)-style plans going forward.

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