Fitch Downgrades Rating on Chicago Debt to One Notch Above Junk
Chicago, Illinois.
The move by the ratings agency comes after the Illinois Supreme Court last week ruled against a law aimed at reining in public employee pension liabilities.
Pointing to financial pressure from public worker pensions, a Wall Street credit rating agency on Monday downgraded over $10 billion of Chicago’s debt to one notch above junk.
Fitch Ratings downgraded to BBB- from BBB+ $9.8 billion of unlimited tax general obligation bonds, and $486 million of sales tax revenue bonds, while also assigning the debt a negative rating outlook. Moody’s Investors Service had already lowered its rating on Chicago’s general obligation and sales tax revenue debt to the speculative Ba1 grade in May of last year.
The Illinois Supreme Court last Thursday ruled against a law that called for lower cost-of-living increases for retirees, and upped employee contributions for workers, covered by two of the city’s pension plans. Siding 5-0 with a group of unions, employees and retirees who brought a lawsuit over the law, the court’s ruling has roots in an Illinois state Constitution provision that says pension benefits are a contractual relationship that “shall not be diminished or impaired.”
Fitch called last week’s court decision “among the worst of the possible outcomes for the city's credit quality.” In a statement, the ratings agency added: “Not only did it 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.”
Without the law the state Supreme Court rejected, Chicago Mayor Rahm Emanuel’s office said in a statement last week that contributions mandated under current Illinois statutes would be insufficient to ensure the financial viability of the two retirement funds affected by the court ruling. These pension plans cover municipal employees and laborers.
Unfunded liabilities for the two funds, the mayor’s office said, are set to increase by $2.48 million per day, or $900 million annually, placing them on a track toward insolvency by 2026 and 2029.
According to Fitch, Chicago maintains four defined benefit pension plans, with a combined funded ratio of around 34 percent and unfunded liabilities that total approximately $20 billion.
Fitch noted the BBB- for Chicago’s debt could stabilize “if the city presents a realistic plan that puts the pension funds on an affordable path toward solvency.”
Bill Lucia is a Reporter for Government Executive’s Route Fifty.
NEXT STORY: Georgia Gov. Will Veto ‘Religious Liberty’ Bill; Indicted Texas Mayor Has Big Election Dreams