CHICAGO - Chicago received a first time rating of A-minus with a stable outlook from Kroll Bond Rating Agency.

Mayor Rahm Emanuel's administration joined several of Chicago's sister agencies in requesting a Kroll rating after being stung by a series of downgrades by Moody's Investors Service over pension woes and the burden of relying on an overlapping tax base.

Moody's rates Chicago's GOs Baa2 with a negative outlook. Standard & Poor's affirmed the city's A-plus rating and negative outlook on Feb. 27 and Fitch Ratings on Feb. 24 affirmed the city's A-minus rating and negative outlook.

"KBRA believes that the city of Chicago's management team has made significant progress toward achieving structural balance through greater efficiencies and reduced reliance on non-recurring sources in the period after 2011," Kroll analysts wrote.

The city's challenges are led by its massive $19 billion tab of unfunded pension obligations which Kroll warned poses a "troublesome situation that is likely to compel very difficult revenue generation and/or expenditure decisions."

Pension plan funding will continue to exert budgetary pressure despite passage of reforms last year to the city's laborers' and municipal employees funds, Kroll wrote. The changes face a legal challenge and the city must tackle a $550 million spike in contributions for its police and firefighters funds next year.

Emanuel continues to seek state-level action for help with reforms and to delay the city's obligation to fully fund public safety pensions, and has warned that without such legislation property taxes could soar. Emanuel's rival in an April 7 runoff for the mayor's office, Jesus "Chuy" Garcia, has not offered up a plan to address the spike.

The city's swaps and terminations triggered by a recent Moody's downgrade also raise credit concerns.

The city successfully renegotiated the rating threshold on one swap with its counterparty staving off a $20 million termination payment. It continues negotiations with a second counterparty on three swaps in which terminations were also triggered. They are negatively valued at $40 million.

"As related to the bank liquidity facilities, KBRA believes the city's liquidity and market access offset concerns related to meeting these obligations in a timely manner," analysts wrote.

The city scores points with Kroll for being home to a substantial tax base with a deep and diverse economy that is widely considered by all the rating agencies among its strongest credit attributes.

The rating agency also looks favorably on the city's maintenance of a $500 million reserve from its lease in 2005 of the Skyway toll bridge, which offsets its traditionally lean ending budget balance. The city's home rule status gives it wide flexibility to address its fiscal challenges although analysts raised concern that a "willingness to raise property taxes remains to be demonstrated."

Chicago has $8.38 billion of general obligation debt.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.