Chicago's Bond Rating Lowered by Moody's to Aa3, Second Cut This Week
Chicago, the third-most populous U.S. city, had its credit ranking cut for the second time in as many days as Moody’s Investors Service lowered its general-obligation bond ranking because of depleted reserves.
Moody’s dropped the city to Aa3, its fourth-highest investment grade, from Aa2, according to spokesman John Cline. Fitch Rating cut its ranking of Chicago’s $6.8 billion general- obligation debt one level to AA, its third-highest, yesterday because of weakened finances from falling tax revenue.
Moody’s cited a “rapid depletion of reserves” by the city, which Fitch said yesterday faces its largest-ever budget gap, at $654.7 million for fiscal 2011. Moody’s said 21.5 percent of the city’s $3.2 billion general-fund budget in 2010 largely came from reserves built up with proceeds from leasing parking meters and the Chicago Skyway, an elevated highway that connects the city to Indiana.
In 2009, 16% of the city’s general fund came from those sources, said Ted Damutz, a Moody’s analyst. The city has about $935 million left in its reserves from the leases, down from $2.95 billion, he said.
Damutz also cited the city’s “unsound practice of not meeting their annual required contribution” to municipal pensions. At the end of 2009, the plan for police personnel was 44 percent-funded, while the pension for firefighters had 37 percent of what was projected to be needed and the plan for municipal employees was 58 percent-funded, he said.
No Significant Effect
Chicago Chief Financial Officer Gene Saffold said yesterday in a statement that Fitch’s lowered credit score wouldn’t have a significant impact on the city’s long-term borrowing costs. He said the rating cut was anticipated.
Lower ratings can raise the cost of borrowing as investors demand higher yields in exchange for what they see as more risk. Chicago plans to issue about $233 million of debt in a negotiated sale Aug. 18, according to Fitch.
“During the deepest economic recession in 70 years, many cities, states, and private corporations have felt the negative impact of this economy on their credit ratings,” Saffold said by e-mail.
Foreclosure filings in the region for first half of 2010 climbed 23 percent from a year earlier to 78,022, including the Naperville and Joliet areas, according to RealtyTrac Inc. Unemployment in Chicago was 11.2 percent in May, compared with 10 percent for all of Illinois, Fitch said.
While Chicago Mayor Richard Daley has fired city workers and imposed furloughs on current employees, the city’s ability to make deeper cuts to personnel are limited because of its highly unionized workforce. Personnel costs account for about 80 percent of the city’s budget.
Daley refused drastic tax increases and spending cuts “when people are suffering,” Saffold said.