* Greg Hinz…
In a blow to Mayor Rahm Emanuel, one of the major bond-rating services today downgraded Chicago’s credit to just two levels above junk, saying the city has not been able to adequately control the soaring cost of worker pensions.
In a statement, Moody’s Investors Service moved city debt to Baa2 from Baa1, and kept the city on a negative outlook. The latter means that there is a likelihood, though not a certainty, that its credit will be further downgraded in coming months.
In response, Emanuel’s office today noted that two other ratings services, Fitch and S&P, have affirmed the city’s credit rating, and characterized the Moody’s view as an outlier “out of step with the other rating agencies, (and) ignoring the progress that has been achieved.”
But the action adds another element of uncertainty for the city and Emanuel just days after the mayor was forced into an April 7 runoff election for a new term.
Moody’s, which also lowered its rating on some sales-tax and water debt, said it acted because of “expected growth in Chicago’s already highly elevated unfunded pension liabilities and continued growth in costs to service those liabilities.”
Even if recent state pension changes survive a court challenge, the ratings statement said, “we expect Chicago’s unfunded pension liabilities — and the costs of servicing those liabilities — to continue to grow, placing significant strain on the city’s financial operations.”
The drop, to a rating of Baa2, could drive up borrowing costs for the city and cause problems with some of Chicago’s current interest-rate swap contracts.
Those problems with the swap contracts could be severe.
* To the Moody’s report…
WHAT COULD MAKE THE RATINGS GO DOWN
• Determination by the IL Supreme Court that the State of Illinois’s pension reform package is unconstitutional, which, depending on the court’s rationale, could increase the risk that the city’s own pension reform would be overturned
• Determination by a court of law that the city’s reform of its Municipal and Laborer plans is unconstitutional
• Continued growth in the city’s unfunded pension liabilities
• Growth in direct and overlapping debt
• Narrowing of the city’s financial reserves
Those first three are very likely. That last one is likely, too, if the state takes Chicago’s income tax revenue sharing cash.
Budget proposals have consequences, folks.