CHICAGO - Fitch Ratings on Thursday downgraded Chicago’s general obligation rating by one notch to AA due to the city’s weakened fiscal position and warned of possible further action by assigning a negative outlook.
The city’s financial flexibility has suffered due to sharp revenue declines and a reliance on reserves, Fitch analysts said. Chicago also carries above-average debt levels and faces rising unfunded pension liabilities. The action affects $6.8 billion of outstanding debt.
“The negative outlook reflects Fitch’s concern that achieving structural balance in the near term will be difficult given rising employee costs and a reluctance to increase property taxes,” analysts wrote. “Significant additional [expenditure] reductions mostly related to personnel will be required.”
Chicago last week announced it faces a record $654.7 million deficit as work begins in earnest on a $6.3 billion 2011 budget. Expectations of a slight improvement in revenue collections are failing to keep pace with growing personnel costs. Mayor Richard Daley has pledged not to raise property taxes, but on Wednesday he warned of possible service cuts.
The rating review comes ahead of the city’s sale later this month of $164 million of tax-exempt GOs and taxable Build America Bonds under its Modern Schools Across Chicago Program, which leverages tax-increment financing funds for new school construction. The city also will sell $70 million of GO notes later this month.
Fitch earlier this year raised the city’s GO rating to AA-plus with a negative outlook from AA as part of its recalibration process. Moody’s Investors Service rates the city Aa2 with a stable outlook and Standard & Poor’s rates the city AA-minus with a stable outlook.
