Moody's Investors Service has downgraded Chicago's credit rating to two levels above junk status, citing the city's $20 billion mountain of unfunded pension liabilities.
The agency said Friday that it lowered the rating on $8.3 billion in general obligation debt from Baa1 to Baa2. Moody's also maintained its negative outlook for Chicago, indicating another downgrade could occur even if recent efforts to address the city's pension problems survive legal challenges.
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"Regardless of outcome of the legal challenges to pension reforms, we expect Chicago's unfunded pension liabilities — and the costs of servicing those liabilities — to continue to grow, placing significant strain on the city's financial operations," Moody's said.
The announcement thrust the pension issue back to the center of Chicago's mayoral campaign. Mayor Rahm Emanuel faces Cook County Commissioner Jesus Garcia in an April 7 runoff after failing to get enough votes for an outright win on Tuesday despite millions of dollars in campaign funds and support from business leaders.
"The Moody's downgrade is yet another sign that Emanuel's financial priorities are simply wrong," said Garcia campaign manager Andrew Sharp. "It's time for change."
The Garcia campaign contended that the downgrade will increase the cost of city borrowing and taxpayers will suffer for what it called "Emanuel's lack of fiscal stewardship."
City Treasurer Kurt Summers responded to the downgrade by saying Emanuel has made significant progress in addressing the pension challenges without unfairly burdening taxpayers.
"Emanuel's strong leadership is critical to continuing the work of putting Chicago's fiscal house in order and securing our city's future," he said.
Emanuel's office also sought to cast Moody's as out of step, noting that other ratings services reaffirmed Chicago's bond rating.
Chicago has the worst-funded pension system of any major U.S. city, with a roughly $20 billion hole in four accounts. Legislation approved last year seeks to eliminate a $9.4 billion shortfall in two of those pension systems by cutting benefits and increasing contributions for both the city and employees.
But Emanuel's pension overhaul is being challenged in the courts.
Moody's said action is needed to stop the debt from growing. The agency said commitments to increasing tax revenue or cutting costs could also prompt it to boost Chicago's rating.
Laurence Msall, president of the Civic Federation, told the Chicago Tribune it was difficult to see how the next administration would manage the crisis "without significant new revenue or dramatic reductions in city services."
"Decades of pension underfunding, failure of the General Assembly to provide pension reform, and the city of Chicago's years of reliance on debt to fund operations have put the city in this financial position," he said.