Fitch Ratings downgraded Chicago’s bond ratings because of its overwhelming pension debt, which now sits at about $19.5 billion, and its inability to come up with a solution to the problem.
Fitch dropped the city’s rating from AA- to A- on $8 billion in general obligation bonds, which are backed by property taxes. It also dropped the rating on $497.3 million in sales tax bonds to A- from AA-, and to BBB+ from A+ on $200 million in commercial paper notes.
Fitch noted in its report that even though the city has made recent improvements in other aspects of its credit profile, the budget is still tight.
The move comes as the leaders of the Illinois General Assembly are working on a deal to end the state’s pension crisis after months of political wrangling have failed to produce a solution.
“Pension stress exacerbates the already weak debt profile, which features above-average debt burden and slow payout,” Fitch said. The agency added that there are several overlapping area governments that also have underfunded pension systems, which will require some measure of increased funding, presenting a stacked burden on residents and taxpayers.
To maintain its new A- rating, Chicago must implement an attainable plan to put all city pension plans on a clear path toward adequate funding, Fitch said. It believes a pension solution that enhances funding levels while preserving sustainable budgetary balance is necessary to stabilize the city’s credit. If the city doesn’t take steps to avoid the looming pension cost increases scheduled for 2016, it will have a negative impact on the city’s rating, the agency concluded.
State law requires dramatically increased annual funding requirements for two of the city's four pension systems beginning in 2016, which would need to be addressed in the fiscal 2015 budget. The new formula requires a contribution that would be sufficient to bring both the police and fire systems to 90 percent funded by 2040.
The city estimates the resulting annual requirement will rise by $580 million as a result, an amount that will raise carrying costs to above-average levels, potentially crowding-out other city spending priorities. Legislation to delay the implementation and require property tax increases to fund it has been introduced, but the legislature has not acted on it, Fitch said.