CHICAGO — Standard & Poor's wants to see how serious Chicago is about fixing its structural budget deficit.
That's the message in a special comment the rating agency distributed Friday morning.
"We expect that during the next five months, as the mayor progresses with his proposed budget and then what is ultimately adopted by the city council, the city will demonstrate how serious it is about implementing both immediate and far-reaching plans to address the structural cracks in its budget," Standard & Poor's said in the comment, which came in response to Chicago's release of its annual financial forecast earlier in the week.
Standard & Poor's assigns a negative outlook to its BBB-plus rating of Chicago, which Moody's Investors Service downgraded to junk earlier this year.
"Given the uncertainty regarding the reform of its police, fire, municipal and laborers plans, we expect city management to consider contingency plans for addressing its pension liabilities, regardless of the outcome for all four of its plans," the S&P analysts added.
Standard & Poor's noted that the analysis which sets the stage for crafting the next year's budget highlights the city's operating challenges with rising deficit expects even before growing pension and debt service costs are factored into the equation.
The city's own gloomy figures hinge on several gambles, notably that state lawmakers and Gov. Bruce Rauner will approve legislation that allows Chicago to slow down its shift to an actuarial based funding formula for its public safety pension plans and delay the date it is supposed to achieve a 90% funded ratio for the plans.
It's unclear whether Gov. Bruce Rauner will sign it, whether it will be part of a more expansive statewide pension bill, or whether Democrats can muster the supermajority needed to override a veto should Rauner refuse to sign it.
"In our view, it would be more conservative to assume the $550 million payment," Standard & Poor's said.
The city's figures also anticipate the Illinois Supreme Court will overturn a recent lower court decision voiding the 2014 municipal and laborers' reforms.
If the city loses, it would shave nearly $100 million off the immediate deficit from increased contributions the city agreed to in the reform package, but those funds would again be in jeopardy of exhausting assets in the next decade. That poses an even bigger long term pressure to the city's balance sheet.
The city's $20 billion unfunded pension tab has dragged its Moody's Investors Service rating down to Ba1.
Chicago carries GO ratings of BBB-plus from Fitch Ratings with a negative outlook, and A-minus with a stable outlook by Kroll Bond Rating Agency.
Chicago Mayor Rahm Emanuel will lay out his proposed budget next month. The buyside is also watching.
Like Standard & Poor's, Municipal Market Analytics suggested an alternative budget solution is needed. Its recent outlook commentary followed the July court ruling on the 2014 reforms.
MMA said it isn't holding out much hope that the city will heed the suggestion given its penchant for "waiting for (and borrowing against) seemingly low probability solutions to manage its near?term budget issues."
MMA warned that the city could lose additional investment grade ratings, although it doesn't expect that would occur this year and it does not seek a material risk of payment default looming.
"Nor would downgrades be cause to sell Chicago paper (except where holdings are limited to investment grade) as current yield penalties and the generally bullish environment on municipal risk likely pose only limited prospects for further underperformance in Chicago spreads," MMA said.
