CHICAGO – Fitch Ratings and Kroll Bond Rating Agency see the Chicago City Council's passage of a record property tax as a good step toward stabilizing the city's finances, though they say plenty of concerns remain.
"While KBRA looks favorably on budget adoption, we believe that the budget contains certain assumptions that rely upon state legislative action, and judicial determination. In the absence of favorable disposition of these issues for the city, budgetary revisions will likely be necessary, and assumed funding costs may rise sharply," Kroll wrote in its Oct. 30 commentary.
Kroll rates Chicago A-minus with a stable outlook.
Fitch, which assigns a BBB-minus rating and negative outlook, issued its own take on the city budget Friday.
It called the property tax increase a "positive as it would create a recurring revenue stream to address the city's rising pension expenses."
But it reiterated many concerns.
"If an Illinois Senate bill is not signed by the governor this year, the city would be required to fund a much larger amount for public safety pensions in 2016," Fitch wrote. "The state's Supreme Court is hearing a case that could push reforms for the city's other two pension plans back to their starting points."
Mayor Rahm Emanuel's $7.8 billion 2016 budget and tax package easily won approval although the 15 members who voted against the revenue package marked the highest level of opposition Emanuel has seen in his five budgets. The council has 50 members.
The city's property tax hike is tied to a re-amortization of the city's public safety pension contributions which were slated to rise by $550 million next year under a 2010 state mandate. A bill to do so, which faces an uncertain fate with Gov. Bruce Rauner, would cut $220 million off the scheduled 2016 increase. The city budget assumes it will pass and if it doesn't Chicago would be forced to come up with more money.
"Prospects for passage grow dimmer as time goes by," Fitch's lead Illinois analyst Arlene Bohner wrote, saying the city could be forced to look to non-recurring revenues or seek a higher tax increase.
Reforms to the city's other two pension funds were voided by a state court as unconstitutional in July. The Illinois Supreme Court will hear the city's appeal on Nov. 17.
"Efforts to shore up those non-public safety pension plans could be put into disarray" if the court ruling goes against the city, Fitch said. "The ability of the city to meet all of its obligations, including actuarially based funding of its pension obligations, in a structurally balanced manner is paramount to the rating."
Fitch warned the city against dipping in to general fund or the Skyway asset lease reserves or risk triggering a rating downgrade.