Chicago credit rating plummets to junk status following pension ruling

Major rating agency downgraded the city of Chicago’s creditworthiness two notches to junk status, a move likely to increase the city’s borrowing costs and make investors skittish as the financial world reacts to last week’s Illinois Supreme Court ruling that bodes ill for city efforts to resolve its massive pension fund shortfall.

City of Chicago

Moody’s Investors Service downgraded the city’s debt rating on bond issues backed by property, sales and fuel tax revenue to Ba1, one notch below investment grade, from Baa2, specifically citing last week’s Supreme Court ruling on an attempt to cut state pension costs. Moody’s calls the Ba1 rating “speculative,” which many investors simply call “junk,” meaning investments in them carry far greater risk of a loss.

Chicago Tribune article by Hal Dardick, May 12, 2015   Photo by Brian Cassella, Chicago Tribune

The downgrade came a few days after the state’s high court struck down changes to four state pension funds, casting doubt on changes that Chicago made to its workers and laborers funds that also are being challenged in court. The ruling also put the city at a disadvantage during negotiations of pension changes with police and fire unions.

While Mayor Rahm Emanuel has maintained that pension changes he engineered for the workers and laborers fund can withstand the legal challenges they face, legal analysts are far less optimistic. Meanwhile, the city faces a shortfall of about $20 billion in its four pension plans and a mandate to make the police and fire pensions financially sound in coming years.

In light of the Supreme Court ruling, “we believe that the city’s options for curbing growth in its own unfunded pension liabilities have narrowed considerably,” stated a Moody’s announcement of the downgrade. “Whether or not the current statutes that govern Chicago’s pension plans stand, we expect the costs of servicing Chicago’s unfunded liabilities will grow, placing significant strain on the city’s financial operations absent commensurate growth in revenue and/or reductions in other expenditures. The magnitude of the budget adjustments that will be required of the city are significant.”