Chicago Cut to 3 Levels Above Junk by Moody’s on Pensions

Chicago’s credit rating on $7.8 billion of general-obligation debt was cut one level to Baa1 by Moody’s Investors Service, which cited “massive” pension liabilities for the third-most populous U.S. city.

The reduction, on the 177th anniversary of Chicago’s incorporation, follows a three-step downgrade in July for the city of 2.7 million. The outlook remains negative, meaning the rating may be lowered further.

The decline to three levels above junk “reflects the city’s massive and growing unfunded pension liabilities, which threaten the city’s fiscal solvency,” Matthew Butler, a Moody’s analyst, said yesterday in a report. “The size of Chicago’s unfunded pension liabilities makes it an extreme outlier.”

The two most populous American cities, New York and Los Angeles, are rated Aa2 by Moody’s, the third-highest level.

Chicago’s pension debt is eight times its operating revenue. The downgrade means the city may have to pay more to borrow when it issues $405 million in general-obligation bonds next week, according to data compiled by Bloomberg. The offering would be the city’s first of such debt since 2012.

“While we disagree with the action taken today by Moody’s, we do agree that the city’s pension challenges will have a direct impact on its long-term financial stability without reform,” Lois Scott, Chicago’s chief financial officer, said in a statement.

Load Tripled

The city tripled its debt load from 2002 to 2012. A $590 million additional payment for retirement obligations is due next year unless state lawmakers step in to restructure the pension funds.

In his annual budget address in October, Mayor Rahm Emanuel painted a portrait of residents and businesses “streaming out of Chicago” if the legislature doesn’t act.

“We will not preside over a city in which garbage is not picked up, graffiti is not removed, and libraries and other vital services must be shut down,” Emanuel said.

The city’s population shrank about 7 percent from 2000 to 2010, while New York and Los Angeles both grew at least 2 percent, U.S. Census data show.

While Scott said the city’s economy is “strong and growing,” that progress is “compromised by the absence of fundamental pension reform.”

Chicago drew comparisons to Detroit in July because Moody’s three-step cut came the day before the Motor City filed a record U.S. municipal bankruptcy.

No Detroit

Standard & Poor’s rejected that notion in a report last week titled “Will Chicago Suffer Detroit’s Fate?” in which it affirmed its A+ rating. That’s the fifth-highest investment grade and three levels above the new Moody’s rank.

Chicago has “solid credit quality, with support from a strong local economy,” S&P analysts including Jane Ridley wrote. Reviewing the city relative to Detroit “demonstrates more differences than similarities -- and ultimately underscores Chicago’s long-term viability against the backdrop of Detroit’s bankruptcy and default.”

Fitch Ratings lowered Chicago’s debt to A- in November, citing underfunded pension plans. The rank is one level higher than Moody’s.

Some Chicago bonds have trailed the longest municipal-bond rally since July 2012.

Tax-exempt Chicago general-obligation bonds maturing in January 2040 traded today at an average yield of 5.18 percent, the highest since Feb. 18, data compiled by Bloomberg show. The most debt exchanged hands since May 2012.

Moody’s released a report in September that showed Chicago and surrounding Cook County have the largest pension burdens among the 50 most-indebted U.S. local governments.

Chicago’s Moody’s rating is one step below Illinois’s A3, which is the lowest among U.S. states. State lawmakers passed a pension overhaul bill in December intended to save $145 billion over 30 years.

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