Chicago had its credit rating cut to junk by Moody’s Investors Service after the Illinois Supreme Court’s rejection of a state pension-overhaul plan reduced the city’s options for fixing its own underfunded system.
The two-level downgrade to Ba1 affects $8.1 billion of general obligations, which were already the lowest-rated among the 90 biggest U.S. cities, excluding Detroit. The outlook is still negative. Moody’s has dropped the city seven levels since July 2013.
The reduction to the highest level of junk “incorporates expected growth in the city’s highly elevated unfunded pension liabilities,” Moody’s said Tuesday. After the May 8 court ruling, “we believe that the city’s options for curbing growth in its own unfunded pension liabilities have narrowed considerably.”
The deterioration in the credit standing of the third-most-populous U.S. city underscores how pension promises are squeezing the finances of states and localities nationwide. Moody’s downgrade compounds Chicago’s fiscal struggles: its counterparties can immediately demand as much as $2.2 billion in accelerated principal, accrued interest and termination fees, New York-based Moody’s said in the report.
The company’s decision may raise borrowing costs in the $3.6 trillion municipal market: The city of 2.7 million was planning to issue about $383 million of bonds as soon as next week, data compiled by Bloomberg show. Some investors had already deemed its bonds speculative grade.
“While Chicago’s financial crisis is very real and at our doorsteps, today’s irresponsible decision by Moody’s to downgrade the city’s credit by two steps goes far beyond that reality,” Mayor Rahm Emanuel said in a statement.
“I am committed to focus on both reform and revenue to address Chicago’s fiscal crisis, and we will continue our work in Springfield and with our partners in labor to ensure we will always meet our obligations,” he said.
Other rating companies have different views of the city’s credit. Standard & Poor’s has Chicago at A+, the fifth-highest investment grade, while Fitch Ratings ranks it two steps lower, at A-.
Trading in the city’s debt underscores the fiscal strain. Taxable Chicago general-obligation bonds maturing in January 2042 traded Tuesday to yield as high as 7.07 percent, the steepest level since January 2014, data compiled by Bloomberg show. The yield is about 4 percentage points above benchmark debt.
After the state Supreme Court said Illinois’s 2013 pension revamp violated the state constitution’s ban on reducing worker retirement benefits, Emanuel argued that the city’s plan would survive.
Chicago is on the hook to pay an additional $600 million into its pension systems next year, and an overhaul that state lawmakers passed for two of its four plans is now in doubt.
The court ruling “raises the risk that the statute governing Chicago’s Municipal and Laborer pension plans will eventually be overturned,” the Moody’s report said. “As the plans move toward insolvency, the city’s credit standing will continue to deteriorate.”