Mounting pension liabilities have cost Chicago another cut in its credit standing as Moody’s Investors Service reduced the general-obligation debt rating for the nation’s third-largest city by three steps to A3, citing a $36 billion retirement-fund deficit and “unrelenting public safety demands” on the budget.
Moody’s also placed the city’s $7.7 billion in general-obligation bonds under a negative outlook, indicating another cut may be made. The moves follow a review that began in April, when the New York-based rating company said it was reevaluating the credit effects of municipal retirement obligations.
Public pensions nationwide are under significant stress following the longest recession since the depression and the financial crisis that punished asset values. The magnitude of the estimated deficit for all plans ranges from $900 billion to more than $4 trillion, depending on the assumptions used.
“Absent significant growth in the city’s operating revenues, escalating pension funding requirements will increasingly strain the city’s operating budget, as pension outlays compete with other spending priorities, including debt service and public safety,” Moody’s analysts said yesterday in the report. They also cited the political obstacles to meaningful retirement system reform at the state level.
Mayor Rahm Emanuel, in a statement released by his office, said the downgrade “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.”
State lawmakers went through two special sessions within the past five weeks called by Illinois Governor Pat Quinn, a Democrat like Emanuel, without making any changes.
“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,” said Emanuel, 53, a former investment banker, congressman and White House chief of staff to President Barack Obama, a Chicago resident.
The Emanuel administration has warned that retirement contributions will cost about $1.2 billion within four years if the state legislature doesn’t restructure the system, up from $476 million last year.
Moody’s analysts Rachel Cortez and Thomas Aaron said the city’s four pensions have reported a $19 billion collective deficit -- about half of what they figure it to be. Chicago’s new rating is four steps above noninvestment, or junk, grade.
The costs of controlling crime in Chicago have added to the city’s financial stress. After a surge in homicides last year, the city of about 2.7 million residents cut its homicide rate by 29 percent in the first half of this year, in part by paying 400 officers overtime to police crime-ridden neighborhoods.
Moody’s had rated Chicago general-obligation bonds at Aa3, or fourth highest. The company also cut its grades on the city’s securities tied to sales-tax revenue and water and sewer debt, to A3 from Aa3 and to A1 from Aa2, respectively, affecting almost $3.9 billion in related debt.
Chicago faced a budget deficit of $298 million before the approval in November of the 2013 spending plan, which would eliminate the projected gap without raising fees or taxes. Chicago Public Schools has said it intends to close 50 schools as part of a plan to eliminate a $1 billion shortfall. A group of parents challenged the move this week, seeking to delay it for at least a year, if not permanently.
The city and Illinois are both coping with the lack of a retirement-system solution. After the legislature adjourned in Springfield, the capital, May 31 without passing a pension fix, Fitch dropped the state to A-, its fourth-lowest investment grade. Three days later Moody’s cut it to A3, the equivalent rank. Standard & Poor’s put the state at the same level.
A general-obligation Chicago bond maturing in January 2022 last traded July 12 at an average yield of about 3.4 percent, data compiled by Bloomberg show. That was about 1.95 percentage points more than top-rated municipal debt with a similar maturity, the data show. By comparison, the securities traded at an average of 2.38 percent on April 1, when the spread to AAAs was 1.49 percentage points.
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