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Moody’s issues Chicago fiscal FAQ

Wednesday, Jul 27, 2016

* 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?

- Posted by Rich Miller        

5 Comments
  1. - Daniel Plainview - Wednesday, Jul 27, 16 @ 3:03 pm:

    - Chicago’s economy is healthy and growing -

    Whatever, collectivist ratings agencies.


  2. - Mama - Wednesday, Jul 27, 16 @ 3:27 pm:

    I think it shows why local government should not be in charge of schools. To much of a chance of local gov. to “borrow” and “Not refund” from the school funds.


  3. - up2now - Wednesday, Jul 27, 16 @ 3:56 pm:

    This city and state are salvageable. It’s just that no one has any idea how to save them or the will to do so. Very sad. We have met the enemy, and he is us.


  4. - Huh? - Wednesday, Jul 27, 16 @ 9:02 pm:

    Comparing Chicago to the other 8500 governments is false and misleading analysis.

    The pensions for many Illinois local governmental agencies are through IMRF which has the highest funding of any of the Illinois pension systems.

    Secondly, teacher pensions outside Chicago are through the State not the local school districts.

    We don’t know what regulations the other local agencies must comply with.


  5. - Maximus - Thursday, Jul 28, 16 @ 8:30 am:

    - Huh? -
    The comparison is using financial numbers and analysis to come up with a rating as Moody’s does for every agency. It’s not false and misleading, it gives investors and understanding of the financial outlook of the entity in question. IMRF is highly funded because it has a clause forcing government entities to pay into it before any other pension funds. It just shifts the underfunding to the firefighter and police pensions and teacher pensions.

    What would be interesting is to hear what Moody’s has as their own ideas on what the reforms to the municipal pension plans should be. As a rating agency I don’t believe they can dabble in that.


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