Moody’s Investors has dropped Chicago’s bond rating another notch, citing “massive and growing unfunded pension liabilities” that “threaten the city’s fiscal solvency” without “major revenue” and budget cuts “ in the near term” and for years to come.
Eight months after ordering an unprecedented triple-drop in the bond rating, which determines city borrowing costs, Moody’s dropped Chicago’s bond rating again — this time from A3 to Baa1 with a negative outlook.
Moody’s noted that Chicago’s $32 billion unfunded pension liability is eight times operating revenue. That’s the “highest of any rated U.S. local government,” the rating agency said.
Moody’s said the Illinois General Assembly’s recent approval of pension reforms for state employees, suburban and Downstate teachers and Chicago Park District workers “suggest that reforms may soon be forthcoming for Chicago,” but it anticipates those reforms will fall far short of a total solution to the crisis.
“We expect that any cost savings of such reforms will not alleviate the need for substantial new revenue and fiscal adjustments in order to meet the city’s long-deferred pension funding needs,” Moody’s wrote. “We expect that the city’s pension contributions will continue to fall below those based on actuarial standards. The city’s slowly amortizing debt levels are also large and growing.”
Moody’s said the negative outlook reflects its expectation that, “Absent a commitment to significantly increase revenue and/or materially restructure accrued pension liabilities and reduce costs, the city’s credit quality will likely weaken.”
The rating agency cited “formidable legal and political barriers” to the decisive action that needs to be taken. They include “ongoing unwillingness to sufficiently increase revenue” and the very real possibility that retirees will file a lawsuit seeking to block any changes the city hopes to make, citing “constitutional protection” of their pension benefits. That’s precisely what happened at the state level.
Chicago’s Chief Financial Officer Lois Scott responded to the latest ratings jolt with a tempered emailed statement.
“While we disagree with the action taken today by Moody’s, we do agree that the City’s pension challenges will have a direct impact on its long-term financial stability without reform,” Scott was quoted as saying. “As noted by other rating agencies as recently as last week — and by Moody’s in a previous report — Chicago’s economy is strong and growing, and the investments in our City since Mayor Emanuel took office point toward a bright future for Chicago. But make no mistake, meaningful pension reform is critical to securing that future.”
In 2015, the city is required by state law to make a $600 million contribution to stabilize police and fire pension funds that now have assets to cover just 30.5 percent and 25 percent of their respective liabilities.
Mayor Rahm Emanuel wants the Illinois General Assembly to put off the balloon payment until 2023. That would give the city time to negotiate a painful mix of employee concessions and increased revenues without raising property taxes so high that it triggers an exodus to the suburbs.
As late as last week, the mayor refused to talk specifics about new revenues needed to meet city employees halfway for fear that, if he does, reform will never come.
Last summer, Moody’s ordered an unprecedented triple-drop in the city’s bond rating, citing Chicago’s “very large and growing” pension liabilities, “significant” debt service payments, “unrelenting public safety demands” and historic reluctance to raise local taxes that has continued under Emanuel.
In September, Standard & Poor’s cited those same factors for changing its outlook to negative on Chicago’s A-plus rating. Last month, Standard & Poor’s reaffirmed that rating.
