Chicago and Detroit are the least prepared among the 25 largest U.S. cities to weather an economic recession of the magnitude that struck the country in the previous decade, Moody's Investors Service said on Tuesday.
The credit rating agency also found that the cities of Boston; Charlotte, North Carolina; Denver; San Antonio, Texas; San Francisco and Seattle have strengthened their ability to handle a downturn without adversely impacting their credit standing, while 17 other cities are moderately prepared. Moody's based its findings on an analysis that focused on fiscal volatility, budget reserves, financial flexibility and pension risk.
"A majority of local governments have used the broad economic expansion of the past decade to strengthen their finances," Nicole Serrano, a MoodyRs analyst, said in a statement. "Additionally, they have been able to keep their debt and related fixed costs in check."
Chicago, which Moody's rates at the junk level of Ba1, was deemed weaker when it comes to being prepared for a near-term recession due to its "extraordinarily high fixed costs, coupled with its escalating pension liabilities," according to the report.
A fiscal 2020 budget approved last month for the nation's third-largest city aims to eliminate an $838 million deficit with new revenue, spending cuts and savings from a bond refunding. Detroit, which is also rated below investment grade at Ba3, exited municipal bankruptcy five years ago after restructuring $18 billion of debt. Moody's said Michigan's largest city continues to face challenges related to pensions, fixed costs, revenue volatility and capital needs.
Still, Detroit has increased reserves, set aside funds to smooth spikes in pension contributions, and developed a capital improvement plan that identifies a variety of funding sources. ''If these trends continue, Detroit's overall preparedness for a future recession will be more in line with major city peers," the report said. Moody's said while a near-term recession is not in its baseline forecast, risks of a downturn are elevated.
Its analysis found that most of the cities would not experience a sudden, unexpected drop in revenue of more than 5 percent in a future downturn, based on their experience in the last recession. Between 2007 and 2011, the median largest one-year revenue decline was 2.7 percent, with five of the cities experiencing no decline, according to the report.
(Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis)