Moody’s Investors Service cut its rating on Chicago’s debt to junk, citing expected increases in unfunded pension burdens after a ruling by the Illinois Supreme Court that overturned state pension changes.
The ratings firm dropped Chicago debt two notches to Ba1 from Baa2, with a negative outlook, saying the city’s options for reducing the growth of its retirement system liabilities “have narrowed considerably.†The ratings change could trigger about $2.2 billion in accelerated payments and fees, Moody’s said.
“Whether or not the current statutes that govern Chicago’s pension plans stand, we expect the costs of servicing Chicago’s unfunded liabilities will grow, placing significant strain on the city’s financial operations†in the absence of revenue growth or expense cuts, Moody’s said.
Chicago’s four pensions collectively have more than $20 billion in unfunded liabilities, and the city says it only has about half of the assets required to pay for retirement benefits. Moody’s cited the “highly elevated†pension costs as cause for a February downgrade to Chicago’s bond rating to two notches above junk.
Tuesday’s move comes after an Illinois Supreme Court decision last week to strike down the state’s 2013 pension overhaul. The law attempted to peel back cost-of-living adjustments to retirees and increase the retirement age for younger workers. Though the state ruling doesn't directly affect the Chicago pensions, it raises the risk that the city’s proposed pension cuts won’t stand up in the courts, Moody’s said.
Mayor Rahm Emanuel said it was “irresponsible†for Moody’s to base its decision on the overturning of a state pension bill that didn’t include the city’s changes. The firm also failed to acknowledge the city’s growing economy or progress made on its financial problems, he said.
