- Fitch drops city's rank to lowest level of investment grade
- Illinois Supreme Court ruled city's pension changes illegal
Chicago had its credit rating cut to the lowest investment grade by Fitch Ratings after the Illinois Supreme Court tossed out Mayor Rahm Emanuel’s plan for dealing with the mounting debt to its workers’ pension plans.
The two-step downgrade on Monday to BBB-, one rank above junk, affected $9.8 billion of general-obligation bonds and $486 million of debt backed by sales taxes. The company said the outlook is negative, indicating that the rating could be lowered further.
The step follows the March 24 decision by the state’s top court to strike down Emanuel’s plan, which required the city and employees to boost contributions to the municipal and laborers retirement funds and cut future cost-of-living increases. The court ruled that it violated safeguards to public pensions enshrined in Illinois’s constitution, illustrating the difficulty Chicago faces in reducing a $20 billion shortfall in its retirement funds.
“Last week’s Illinois Supreme Court ruling striking down pension reform legislation for two of the city of Chicago’s four pension plans was among the worst of the possible outcomes for the city’s credit quality,” Fitch said in an e-mailed statement. “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.”
Chicago is already the worst-rated major U.S. city after once-bankrupt Detroit, with a rating one step below investment grade from Moody’s Investors Service. It’s facing growing bills to its pensions after years of failing to set aside enough to cover all the benefits that have been promised to workers who will retire in the years ahead.
The need to put more taxpayer money into the pension system spurred officials to last year approve a record property-tax increase. Under the now void law, Chicago’s pension bill due this year was projected to be more than double what it was a decade ago.
The ruling eases some immediate demands as the overturned law had stepped up the city’s required contributions. After the decision, Emanuel vowed to keep working on a plan that protects pensions, is fair to taxpayers and ensures the city’s long-term financial health. Without the restructuring, the unfunded liabilities of the municipal and laborers funds will climb by $900 million a year, making them insolvent by 2026 and 2029.
“The decision by the Illinois Supreme Court is disappointing, but the city’s ability to pay our debt and meet our current commitment to the pension funds has not changed,” Carole Brown, Chicago’s chief financial officer, said in an e-mailed statement on Monday.
Investors had projected that the city would lose after a lower court ruled the overhaul illegal in July.
The most-active Chicago bonds over the past week, which mature in 2035, traded for an average of 98.8 cents on the dollar Monday to yield 5.4 percent. That’s little changed from the trading the day before the top court’s ruling, according to data compiled by Bloomberg.