Moody’s Investors Service downgraded the rating on the city of Chicago’s $8.3 billion in general obligation debt to Baa2 from Baa1 on Friday, Feb. 27. Click on the graphic below to see where the rating stands in relation to Moody’s long-term rating scale.
Unfunded pension liabilities were cited in Moody’s summary rating rationale for the downgrade:
“The Baa2 GO rating incorporates 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 city's tax base is significantly leveraged by the direct debt and pension obligations of the city, as well as indirect debt and pension obligations of overlapping governments. The rating also reflects credit attributes, including the city's broad legal authority to tap into its large and diverse economy for new revenue, management's efforts to control growth in other operating costs, and the healthy state of current financial reserves.”
In addition to the downgrade, Moody’s maintained a negative outlook for the city’s long-term ratings due to the city’s unfunded pension liabilities.
“We expect substantial growth in unfunded pension liabilities even if the city's recent pension reforms survive an ongoing legal challenge. Court determination that the city's pension reforms violate the state constitution will likely hasten the rate at which unfunded liabilities and pension costs grow. Regardless of outcome of the legal challenges to pension reforms, 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 absent commensurate growth in revenue and/or reductions in other expenditures.”
Moody’s also outlined things that could cause the ratings to improve, as well as decrease further.
Source: Moody’s Investors Service
The downgrade has taken center stage of the mayoral race.