Lois Scott is one of the four founders of Women in Public Finance.
Lois Scott

CHICAGO - Moody's Investors Service delivered a sharp blow to Chicago's general obligation and sales tax rating Tuesday, dropping them down to Baa1 over the city's mounting unfunded pension woes that threaten its "fiscal solvency."

Moody’s downgraded the GO and sales tax ratings one level from A3 and also hit the city’s water and sewer bonds with a downgrade. Analysts warned the credit deterioration could continue by assigning a negative outlook to the ratings on the city’s $7.8 billion of GO debt, $556 million of sales tax bonds, $1.9 billion of water bonds, and $1.3 billion of sewer bonds.

"The Baa1 rating on Chicago's GO debt reflects the city's massive and growing unfunded pension liabilities, which threaten the city's fiscal solvency absent major revenue and other budgetary adjustments adopted in the near term and sustained for years to come," Moody's wrote.

The lowest investment grade rating from Moody's is Baa3.

Moody's downgraded the city's senior lien water and sewer revenue bonds one level to A2 from A1 and its second lien bonds to A3 from A2. The bonds are backed by system revenues.

The action Tuesday followed Moody's decision last July to slap the city's GOs with a three notch downgrade. Standard & Poor's soon shifted its outlook on the city's credit to negative and Fitch Ratings followed with its own triple notch downgrade in November.

Fitch last week affirmed the city's A-minus rating and negative outlook and Standard & Poor's affirmed its A-plus and negative outlook. The reviews come ahead of the city's sale next week of $400 million of GO debt, its first since the round of credit deterioration last year.

Moody's said its calculation of the city's fiscal 2012 adjusted net pension liability of $32 billion is 8 times its operating revenue, making it an "extreme outlier among its rated credits." Chicago now shares the same rating as Providence, Rhode Island, which carries a stable outlook.

Chicago's chief financial officer Lois Scott disagreed with Moody's decision to drop its rating down to Baa1 saying it was due to Moody's adoption in January of revised GO criteria and no change in the city's credit profile.

"While we disagree with the action taken today by Moody's, we do agree that the city's pension challenges will have a direct impact on its long-term financial stability without reform," Scott said in a statement.

The city's most recent actuarial assessment puts its total unfunded obligations at $19.5 billion for a collective funded ratio of 35%. Two of its four funds - its municipal and laborers' funds - are on the road to insolvency in the coming decade. The city is facing a $600 million spike in payments next year for its police and firefighters' funds under a prior state mandate.

The downgrade comes even as prospects for passage of reforms by state lawmakers have brightened following the General Assembly's adoption of state level reforms in December and promises to tackle local government reforms this year. The Chicago Park District also won passage of a reform package last year.

The city's obligations have grown so burdensome that Moody's warned even if a package is approved for Chicago "any cost savings of such reforms will not alleviate the need for substantial new revenue and fiscal adjustments in order to meet the city's long-deferred pension funding needs."

Moody's also warned it expects the city's payments will continue to lag an actuarial level. The city's payments tied to a state formula have underfunded the actuarially required contribution level by more than $7 billion between 2003 and 2014.

While the city's pension strains have taken center stage, Moody's said other factors also weigh against the city. That includes its large and growing debt load, slow amortization of debt service as the city pushes some debt repayment off, and the overlapping debt burden of other local governments on the same tax base.

The city's strengths include its large tax base, diverse regional economy, and broad legal authority to raise revenue.

"The negative outlook reflects our expectation that, absent a commitment to significantly increase revenue and/or materially restructure accrued pension liabilities to reduce costs, the city's credit quality will likely weaken," Moody's wrote. "The formidable legal and political barriers to these actions are incorporated in the outlook. "

"As noted by other rating agencies as recently as last week - and by Moody's in a previous report - Chicago's economy is strong and growing, and the investments in our city since Mayor Emanuel took office point toward a bright future for Chicago. But make no mistake, meaningful pension reform is critical to securing that future," Scott said in her statement.

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