* From Moody’s…

On Monday, July 25, Moody’s Managing Director Naomi Richman delivered a speech to the City Club of Chicago concerning that city’s credit rating, which is Ba1 with a negative outlook. We have taken her remarks and presented it here as an FAQ document. The questions and answers are divided into four sections:

Why is Chicago rated so low? Of virtually all the 8,500 local governments across the country that we rate, Chicago has by far the highest unfunded pensions, and its debt load is also very high. The sum of Chicago’s debt and pensions is 9.4 times the city’s operating revenue, versus 2.4 times for the average US city.

What would it take to upgrade Chicago to investment grade? The city’s unfunded pension liability would need to begin to stabilize and decline. The actions the city has taken to date have only enabled their pension problem to get worse at a slower pace.

Why isn’t Chicago rated even lower? Chicago has a very different credit profile than governments that have defaulted on their debt. Chicago’s economy is healthy and growing, unlike other cities that have defaulted where the economies went through a long, steep decline, and where finances were in much worse shape than Chicago’s.

What are we watching? Three key credit questions are on the horizon: how will the city propose to reform the municipal pension plan and how will that affect the pension trajectory; how will pension plan investment earnings compare to the plans’ assumed returns; and how will Chicago Public Schools (CPS - rated B2/negative) resolve its own financial problems.

* Related…

* Moody’s official: Chicago’s still got time to fix pension problem: 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 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.

* AUDIO: City Club of Chicago: City of Chicago Finances: Are We on the Brink?