DALLAS -- Chicago got its first good rating news after announcing funding plans for the city's municipal and laborers pension funds.
Fitch Ratings revised its outlook on Chicago to stable from negative Tuesday, while affirming the city's ratings, including its BBB-minus long-term issuer default rating, the lowest investment grade.
Also affirmed at BBB-minus with the new stable outlook were $9.2 billion of unlimited tax general obligation bonds and $536.7 million of sales tax bonds.
Fitch maintains a negative watch on $181.3 million motor fuel tax revenue bonds, rated BBB, which are linked to Fitch's rating watch on the state of Illinois.
Fitch said that the outlook revision reflects the recently enacted material increase in funding to the city's pensions. "The chronic underfunding of pensions over many years has resulted in a high and growing long-term liability burden and constrained expenditure cutting flexibility," it wrote.
Earlier this month, Chicago announced plans for a new water/sewer tax to support larger contributions into its municipal pension plan.
The tax would rise incrementally over five years to reach $239 million annually, with the revenue used to cover higher contributions to the municipal employees' pension fund.
At the end of the ramp, the city would reach an actuarially based contribution level designed to hit a 90% funded ratio in 2057. It resembles plans in place for the city's police and firefighter funds and one proposed for the laborers' fund. The city would also dip into general fund and enterprise funds to help cover higher contributions.
City council approval of the new tax is still needed and state lawmakers must sign off on changes to the pension payment scheme because the current formula is set in statute. Chicago Mayor Rahm Emanuel intends to seek council approval in September and will present the General Assembly with legislation for consideration during its annual fall veto session.
Fitch also attributed the change in outlook to the city's financial profile, which it said had also improved in recent years.
Chicago halted the use of reserves to help balance the books bringing down one-time revenue use to $40 million this year from $570 million. The city continues to rely on scoop-and-toss, in which it issues new debt to pay off maturing debt, but it is scaling back and plans to eliminate the practice by 2019.
The city also continues to pare back its use of debt to cover operating expenses like retroactive pay raises and judgments, increasing its operating budget for settlements and judgments by 40% since 2013. The city, however, has not said how much is still being pushed on to its debt load.
"Fitch's action today is proof positive that Chicago's finances are moving in the right direction," Emanuel said in a press release. "We inherited decades of legacy liabilities and the financial challenges they brought, and we are continuing a deliberate strategy of reforms to put Chicago on a path to long-term financial stability, so we can continue to invest in our future.
"We are not going to solve the pension funding challenges overnight, but we have made substantial progress to finally put all four pension plans on a path to solvency, and we are seeing favorable responses from ratings agencies."
S&P Global Ratings previously said Chicago's credit outlook could be changed once the City's water/sewer increase is approved. S&P rates Chicago GOs BBB-plus with a negative outlook.
The city's GOs are rated at the junk level of Ba1 by Moody's Investors Service and BBB-plus by Kroll Bond Rating Agency. Both have negative outlook on the ratings.
