The Next Detroit? Bond Rating for Rahm's Chicago Downgraded by Moody's

On the eve of Detroit filing the largest municipal bankruptcy in American history, Rahm Emanuel’s Chicago had its bond rating downgraded by Moody’s Investor Services.

Moody’s summarized the following weaknesses contributing to the city’s downgrade:

• Extremely underfunded pension plans: actuaries of the city’s four pension plans reported a total unfunded actuarial accrued liability (UAAL) of $19 billion as of December 31, 2012; using more conservative assumptions, Moody’s calculates an ANPL of $36 billion

• The city’s contributions to the pension plans remain well below a rapidly increasing annual required contribution (ARC); in 2012 alone, the city underfunded its ARC by more than $1 billion

• By 2015, state legislation will require the city to increase contributions to its public safety pension plans; the city projects its pension contributions will increase from $467 million in 2014 to $1.2 billion in 2015, placing tremendous strain on the city’s operating budget

• The Illinois Constitution’s explicit protection of pension benefits all but ensures that any attempt to reduce the benefits of existing members would face litigation

• Limited political appetite for tax hikes that would improve pension funding

• Elevated debt levels, even without factoring in pension obligations

“There’s no way to sugarcoat this,” said Brian Battle, director at Chicago-based Performance Trust Capital Partners, an investment adviser specializing in fixed-income products. “This is bad for Chicago.”

Emanuel issued a response to the downgrade, shifting responsibility for the city’s inability to solve its financial mismanagement away from himself:

This confirms what I have been saying for more than a year. Without comprehensive pension relief from Springfield, municipalities such as Chicago will continue to receive negative reviews from rating agencies.

I have used every tool available to tackle and reform government, strengthen our financial position, and invest in our City’s future. But the pension crisis that is nearing our doorstep puts all of those investments at risk. I urge our leaders to come together, find common ground, and pass pension relief that will give taxpayers, retirees, residents, and rating agencies confidence in our City’s finances and our City’s future.

Despite the bad news Emanuel claims he has “predicted,” his administration, with the help of a rubber stamp city council, continues to implement a grandiose infrastructure renovation plan, “Chicago Forward,” estimated to cost $7 billion. In addition, they continue to blow taxpayer dollars on frivolous luxuries that benefit a small few in the city, such as $91 million for over 650 miles of protected bike lanes.

The Chicago Tribune reports that city residents may face doubling property taxes as a result of the downgrade in order to put the city on more solid financial footing. 

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