S&P Global Ratings' general obligation (GO) rating on the city of Chicago's debt is unaffected by the adopted 2017 budget. In our view, the adopted budget remains structurally imbalanced due to its reliance on debt and other one-time actions to cover the budget gaps. Overall, we consider Chicago's overall budgetary performance to be very weak. However, the corporate fund budget gap has narrowed in 2017, indicating some near-term relief in the city's budgetary pressures, so we therefore are not contemplating any rating action based solely on the adopted budget.
One area of the budget that improved is the size of the city's corporate fund budget gap, which shrank to $137 million, the smallest since 2011. Although it is still not balanced, the overall operating fund's improved position is a result of management taking targeted actions.
However, the sustainability of the pension plan for municipal employees may be short-lived; poor market returns in the pension plans could cause further budget stress if assets were to fall to a degree that was not anticipated by the city. Additional future pressure is expected when the pension funding schedule transitions out of its five-year ramp up, causing an expected uptick in the pension contributions starting in budget year 2022; at that point, annual contributions will be calculated based on a goal to fund the four pension plans to 90% within 40 years. In our view, the city's structural imbalance in its overall operating budget, which factors in pension contributions, will take multiple years to rectify. The adopted budget calls for larger contributions in all four of the plans, and closes the corporate fund budget gap. However, there are key weaknesses in both aspects of the operating budget that could undermine the city's long-term progress in shedding its structural imbalance. Credit quality could be threatened if the measures taken to date by the city prove insufficient to achieve structurally balanced budgets in the next two years. Unplanned increases in pension contributions, public safety expenses, or other types of negative budget variances that widen the city's current structural budgetary imbalance could also lead to weakened credit quality, particularly if the city were to dip into its Skyway fund reserve to bridge budget gaps or for one-time items; as we believe the prospects for replenishing reserves in a timely manner are remote.
