S&P warns of Chicago rating downgrade without pension fixReprints
(Reuters) — Standard & Poor’s Ratings Services said on Thursday it will likely downgrade Chicago’s A-plus credit rating if the city lacks a plan to “sustainably” fund its pensions by the end of this year.
The warning was released in the wake of Rahm Emanuel’s re-election on Tuesday for a second term as Chicago mayor.
“Following Tuesday’s vote, in order to maintain its current rating, we expect the administration to address the pension and budget challenges head on by providing solutions that will support the city’s credit strengths in the near and far term,” S&P credit analyst Helen Samuelson said in a statement.
Chicago’s credit ratings, particularly with Moody’s Investors Service, have been falling over the last five years as the city’s financial woes worsened. The warning from S&P, which rates Chicago higher than the other two major rating agencies, sets a tight deadline for a fiscal fix.
A multiple-notch downgrade is possible if the city fails to come up with structural solutions to address its budget deficit and pension problem, according to S&P.
S&P said Mr. Emanuel “avoided addressing the possibility of property tax increases” to pay for pensions during the campaign. In the past, the mayor has said the city’s property taxes, which are mostly tapped for pensions and bond payments, would have to double to accommodate escalating pension costs.
Emanuel’s office had no immediate comment.
Chicago has projected contributions to its four pension funds of $478.3 million this year, increasing to $1.1 billion next year and climbing to $1.638 billion in 2020. The increase is largely due to an Illinois law that requires higher payments to public safety worker pensions in order to reach 90% funding by 2040.
Chicago ended 2013 with an unfunded pension liability of $19.2 billion in the four funds, leaving them only 37% funded, well below the 80% level considered healthy. The city has also projected that its $300 million structural budget deficit would approach $1 billion next year with the pension payment increase.
S&P said the city could maintain the A-plus rating “if Chicago is able to successfully absorb its higher pension costs while maintaining balanced budgetary performance and reserves at or near their current level.”
S&P’s A-plus rating with a negative outlook for Chicago’s general obligation debt is higher than Fitch Ratings’ A-minus and the Baa2 rating from Moody’s Investors Services that is just two notches above the junk level.