Moody’s Investors Service has slashed Chicago’s general obligation and sales tax ratings by three notches to A3 from Aa3 due to the city’s large and growing pension liabilities and related budget troubles.
The move affects $8.2 billion of Chicago’s general obligation and sales tax debt, Moody’s said in a statement. It will make it more expensive for the city to borrow money, and Moody’s said it may further downgrade the ratings if conditions don’t improve.
“The current administration has made efforts to reduce costs and achieve operational efficiencies, but the magnitude of the city’s pension obligations has precluded any meaningful financial improvements,” Moody’s said.
The credit rating agency added that its negative outlook is based on the “dramatic spike in annual pension payments scheduled to take effect in the 2015 budget year.”
Moody’s said it expects the payments “will place material strain on the city’s operating budget.”
* Meanwhile, Marc Joffe makes more assertions about the state’s bond ratings…
Noting that Illinois has not defaulted on a bond since the 1840s, Pallasch and Sinsheimer said Illinois bonds are safe investments. Marc Joffe, a San Francisco consultant, agrees.
“I think people have vastly inflated estimates of how risky Illinois bonds are,” says Joffe, who once worked for Moody’s Investors Service, which shares Standard & Poor’s pessimistic views on Illinois’ bonds. “There’s not a lot of distance between Illinois and junk (bond status).”
If he were doing the math – and he has – Joffe said that he would rate Illinois at between AA and AAA, which is the highest possible grade. In a paper published last month, Joffe compared Illinois with Indiana, which has a high credit rating from Wall Street, and found that while bonds issued in the Land of Lincoln are riskier than bonds issued by the Hoosier State, the risk in both cases is negligible.
He likens the difference to the odds of dying in a plane crash versus the odds of dying in an automobile accident. Traveling in a a car is riskier, he says, but the odds are so remote that virtually no one takes them into account when deciding how to get from Point A to Point B.