CHICAGO – Chicago's general obligation and water and wastewater bond ratings were affirmed by Moody's Investors Service, which confirmed its dim view of the city's near-to mid-term fiscal prospects.
Moody's Wednesday affirmed the Ba1 rating, one notch below investment grade, it assigns to $7.8 billion of the city's GOs, $417 million of sales tax bonds, and $263 million of motor fuel tax-backed bonds. The rating agency has not been asked to rate more recent GO deals.
"The negative outlook reflects our expectation that Chicago's balance sheet will continue to weaken as, absent more aggressive budgetary adjustments, the city's long-term liabilities will rise," Moody's wrote.
Worries over the impact of Chicago Public Schools' budget and liquidity crisis also pose a threat. "The outlook also incorporates the deepening fiscal stress of Chicago Public Schools, which raises the possibility of direct or indirect contagion on the city's financial operations," analysts added.
Moody's downgrade of Chicago GOs to junk last spring, and its other downgrades on water and sewer debt, triggered termination events on swap and bank support contracts that posed a potential $2.2 billion liquidity crisis to the city.
The city's costly plan to resolve the crisis relied on pushing much of its outstanding short-term debt onto its long-term debt load, converting floating-rate securities to fixed rates to shed bank support, and paying $250 million to cancel swaps.
The City Council Wednesday approved the final piece of the fix when it signed off on water bond borrowing to pay off another $100 million in swaps. The city intends to sell as much as $700 million to convert nearly $500 million of floating-rate debt to a fixed rate and roughly $100 million to cancel the derivatives.
"This is another additional step in righting the ship, fixing the fiscal conditions of the city, and making our health of our fiscal picture stronger," Mayor Rahm Emanuel said after the council meeting.
Moody's said the GO rating balances the city's "large, diverse and recovering economic base with outsized and growing leverage."
Moody's gave points for the "significant steps the city is taking to stabilize fiscal operations," but said they fall short of halting "the escalation of pension debt over time." Emanuel pushed through a record $543 million property tax hike last fall to pay for rising police and firefighter pension contributions, but the figure falls short of what's needed to cover rising payments unless the state approves a re-amortization of the payment schedule.
Many expect the Illinois Supreme Court will soon overturn reforms to the city's municipal and laborers' funds, easing pressures on the 2016 budget but returning the funds to a payment schedule that leaves them insolvent in the next decade. The city is carrying $20 billion of unfunded liabilities.
The sales tax and motor fuel tax ratings are capped at the GO level due to the absence of legal segregation of pledged revenue from the general operations of the city.
Moody's also affirmed the Baa1 rating on $26.2 million of senior lien water bonds and Baa2 on $2.2 billion of second lien water bonds. It affirmed the Baa2 rating on $35 million of senior lien wastewater bonds and Baa2 rating on $1.3 billion of the city's $1.6 billion of second lien bonds. Those outlooks are also negative.
The ratings benefit from the city's unlimited rate setting authority with only council approval needed.
The reviews represent its routine surveillance of the credits, Moody's spokesman David Jacobson said.