• Unfunded pensions, debt equate to nine times operating revenue
  • Downgrade is more likely than upgrade for city, Richman Says

Chicago still has time to fix its pension problem, but if the junk-rated city wants to improve to investment grade, it must reverse the direction of its mounting retirement debt, according to Naomi Richman, a managing director at Moody’s Investors Service.

“Time is not about to run out for Chicago,” Richman said during a panel at the City Club of Chicago on Monday. “The city clearly doesn’t have forever, but there’s still time we think to make policy changes to avoid a full blown financial crisis.”

Chicago is not on the brink of default, according to Richman. The total of Chicago’s pensions and debt is more than nine times the city’s operating revenue, she said. That means that more than 35 cents of every dollar of the budget goes to pay debt and pensions. Chicago’s pension debt has ballooned to about $33 billion, according to its latest annual financial report, which factors in new accounting rules.

The nation’s third most-populous city has the highest unfunded pensions of “virtually all” 8,500 local governments that Moody’s rates across the country, Richman said. The city isn’t even making its full actuarial pension payment. If it were, more than half of the budget would go to those bills, she said. This leaves less money for government services.

Junk Rating

Moody’s rates Chicago Ba1, one step below investment grade, and has a negative outlook. Right now, a downgrade is “much more likely” than an upgrade, Richman said. To get on track for an upgrade, the city needs to reverse “the trajectory of the pension problem,” Richman said. Last year, Mayor Rahm Emanuel pushed through a record $543 million property tax increase that will shore up public-safety pensions. Investors applauded the move and rallied the bonds. Still, it’s not enough, according to Moody’s.

"It’s letting the problem get worse at a slower pace,” Richman said. It would cost Chicago about a $1 billion a year to make the pension smaller the following year, she said.

Moody’s recognizes that Emanuel and the city council inherited fiscal problems, and they are showing a willingness to take on those issues. Plus there are positive signs. Governments that defaulted on their debt like Detroit and Puerto Rico have real differences with Chicago, like the economy, Richman said.

“While Chicago’s challenges are very real, very serious, and if pension problem is never addressed you could ultimately get to that brink, we’re not there quite now,” Richman said.

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