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Moody’s Investors reaffirms Chicago’s junk bond rating but lowers outlook to ‘negative’

The change reflects the “expectation that the sudden and substantial decline in certain economically-sensitive revenue will intensify the city’s challenge to reduced the persistent structural gap between revenue and expenses.”

Chicago skyline as seen from Soldier Field.
Moody’s says the outlook for the city’s credit rating is “negative.”
Sun-Times file

Moody’s Investors on Thursday reaffirmed Chicago’s junk bond rating, but changed the outlook from “stable” to “negative.”

“The change in the outlook to negative from stable reflects the expectation that the sudden and substantial decline in certain economically-sensitive revenue will intensify the city’s challenge to reduce the persistent structural gap between revenue and expenses,” Moody’s wrote in its ratings action report.

“Any negative variances arising from the uncertain operating environment could intensify and prolong the challenge. The city’s high and growing leverage from debt and pensions will also continue to weigh on its credit profile.”

To help wipe out a $1.2 billion shortfall primarily caused by the coronavirus, Mayor Lori Lightfoot is asking Chicago taxpayer to absorb a $94 million property tax increase followed by annual cost of living increases.

The mayor’s “pandemic” budget also raises taxes on gasoline, computer leases and cloud services. It includes furlough days for non-union employees, 350 layoffs for unionized employees and a $1.7 billion debt restructuring and refinancing with nearly $949 million of the savings claimed in the first two years.

“Fitch and Moody’s have affirmed what we know — the City’s 2021 budget strikes the right balance in addressing the significant financial challenges created by COVID. Their affirmation of the rating indicates that the credit worthiness of the City has been maintained in the budget proposal,” Budget and Management spokesperson Kristen Cabanban wrote in a statement.

Last week, Standard & Poor’s noted Chicago is “using one-time measures to address the $800 million hole in her 2020 budget” created by the state-at-home shutdown and prolonged economic slowdown created by the coronavirus.

“This approach increased the city’s fixed cost and can limit flexibility in the future by elevating the debt burden and extending the final maturity,” S&P wrote.

“However, it also allows the city to keep reserves on hand to rill future budget gaps or revenue shortfalls, if needed.”

Standard & Poor’s revised Chicago’s outlook from stable to negative in April, citing its expectation that achieving “structural balance” and meeting the “ramp-up” in pension payments was “made markedly more difficult by COVID-19” and the pandemic-induced recession.

If the city’s plan to “address potential pressures beyond 2021 don’t make sufficient progress to return to structural balance, the rating will be pressured further. … A sustained deterioration in liquidity or reserves could also negatively pressure the rating,” S&P wrote.

Former Mayor Rahm Emanuel spent the first of his two terms trying to negotiate pension reforms that were ultimately overturned. The Illinois Supreme Court upheld a pension protection clause that says those benefits “shall not be impaired or diminished.”

That triggered a downward spiral: Moody’s lowered Chicago’s bond rating to junk status and did the same at the Chicago Public Schools and Chicago Park District. Standard & Poor’s and Fitch announced lesser drops.

Emanuel was so incensed by Moody’s new ratings and the added borrowing costs associated with it, he demanded that Moody’s stop rating Chicago bonds.