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Economy


Article

Moody’s downgrades Chicago’s creditworthiness

Moody’s downgrades Chicago’s creditworthiness

Due to growing problems with the city’s pension funds, Moody’s Investors Service has downgraded Chicago's credit rating.
  • Written by Derek Prall
  • 10th March 2014

Moody’s Investors Service, a major bond-rating agency, downgraded Chicago’s creditworthiness last week, citing “massive and growing” pension problems. The move may make it more expensive for the city to borrow money.

Chicago has long struggled with repaying the pensions promised to current and retired workers. According to CNNMoney, next year the city’s annual obligation will more than double to $1.07 billion. Pension reform remains high on many Chicago lawmakers’ list of priorities.

But without major tax hikes or budget cuts, Moody’s says the looming pension problem threatens the city’s fiscal solvency, CNNMoney reports. According to The Chicago Tribune, Moody’s rated the city’s upcoming $388 million bond issue at Baa1, down from A3. The new rating is still investment grade, but Moody’s gave the city a “negative outlook.”

Moody’s says Chicago has the highest level of unfunded pension debt “of any rated U.S. local government,” The Chicago Tribune reports. The downgrade will likely increase the costs of borrowing money for the city.

“While we disagree with the action taken today by Moody's, we do agree that the city’s pension challenges will have a direct impact on its long-term financial stability without reform,” Chicago Chief Financial Officer Lois Scott said in a statement.

The downgrade will affect $8.3 billion in city debt, including $7.8 billion in general obligation bonds and $556 million in sales tax bonds. CNNMoney reports the downgrade puts the city’s debt a few notches above junk status, and if Moody’s outlook remains negative, it could mean additional downgrades.

"The negative outlook reflects our expectation that, absent a commitment to significantly increase revenue and/or materially restructure accrued pension liabilities to reduce costs, the city's credit quality will likely weaken," according to Moody’s.

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