Chicago Debt Downgraded to Near 'Junk Bonds'

Fitch Ratings downgraded the City of Chicago’s credit rating to just one step above “junk bonds” on March 28.

Fitch stated that last week’s Illinois Supreme Court decision voiding a law aimed at boosting funding for two of the city’s pension funds was “among the worst of the possible outcomes for the city’s credit quality.”  The agency’s credit analysts warned that the rating could be downgraded further in the absence of “a realistic plan that puts the pension funds on an affordable path toward solvency.”

Chicago’s debt rating was slashed two-notches to BBB-minus, which is just one step above “junk.” The new rating affects $9.8 billion of the city’s general obligation bonds (GOs) and $486 million of sales tax revenue bonds.

In what was considered a controversial decision last May, Moody’s Investor Services cut Chicago’s credit rating to junk by chopping it rating by two notches from Baa2 to Ba1.

Standard & Poor’s chose to maintain its investment grade rating on America’s third-largest-city in July, but lowered the credit score by one notch to BBB-plus from A-minus.

With Fitch and Standard & Poor’s credit services still rating the Chicago bonds investment grade, the city was able to sell $500 million in municipal bonds on January 12 at what Reuters referred to as a “hefty yield” for an investment grade issue of 4.875 percent.

But the troubled Chicago Board of Education, already rated as “junk” by all three credit rating agencies, was forced to pay an 8.5 percent yield to sell only $725 million of an originally planned $795.5 million of tax-exempt bond issue on February 3.

Fitch’s issued a terse March 28 statement, “Not only did (the Illinois Supreme Court) strike down the pension reform legislation in its entirety, but it made clear that the city bears responsibility to fund the promised pension benefits, even if the pension funds become insolvent.”

Chicago’s unfunded pension obligations total $29.80 billion for its four main retirement systems. At a stunning 15.9 percent of its entire property tax base, that is the highest of America’s 50 largest local governments, according to a recent report by Moody’s.

The Illinois Supreme Court rejected Chicago’s assertion that a 2014 state law affecting the city’s municipal and laborers’ retirement systems would actually have been a benefit to workers and retirees by taking steps to avoid an expected pension fund insolvencies in the next 10 to 13 years.

But the city’s powerful unions and retirees challenged the law, because it required the city and affected workers to increase their pension contributions and eliminated the wildly expensive 3 percent guaranteed automatic annual cost-of-living increase for retirees.

Fitch said Chicago now “must rely on meaningful use of revenue and expenditure controls to meet much higher annual payments.”

Despite the debt crisis, Mayor Rahm Emanuel said that Chicago still intends to raise as much as $1.25 billion in another GO bond sale this year.