First the Motor City, then the Windy City.
In the same week the City of Detroit made national headlines by filing the largest municipal bankruptcy in national history, the City of Chicago made smaller headlines when Moody’s Investors Service announced it had hit the city with a nearly unprecedented triple-downgrade of its credit rating on general obligation bonds.
Chicago now has a credit rating four notches below New York and Los Angeles and below other large cities in the Midwest, including Milwaukee and Cleveland.
In a statement, Chicago Mayor Rahm Emanuel said, “This confirms what I have been saying for more than a year. Without comprehensive pension relief from Springfield, municipalities such as Chicago will continue to receive negative reviews from rating agencies.” Emanuel became mayor in 2011, following the 22-year reign of Richard M. Daley.
Higher Debt Service Costs
The three-notch downgrade – with a negative outlook – does not bode well for Chicago’s bond investors, residents, or taxpayers. The city’s debt is estimated at $8.2 billion, and the big drop in its credit rating means its costs of repaying the debt and issuing debt in the future are sure to go up.
“The downgrade of the [general obligation bond] rating reflects Chicago’s very large and growing pension liabilities and accelerating budget pressures associated with those liabilities,” Moody’s wrote in announcing the downgrade. “The city’s budgetary flexibility is already burdened by high fixed costs, including unrelenting public safety demands and significant debt service payments. “
Those fixed costs could soon eat up half of Chicago’s operating budget, according to Moody’s, forcing the city to reduce services or raise taxes to maintain current service levels. The city this year has a budget of approximately $6.5 billion.
Only 22% Funded
Moody’s estimates Chicago’s four government pension funds have only 22 percent of the assets needed to pay promised benefits. City officials peg the figure at 35 percent. Moody’s says using conservative assumptions, Chicago’s pensions could be underfunded by $36 billion. Even generous assumptions put the underfunding at $19 billion.
The city last year shorted its pension fund payments by more than $1 billion, according to Moody’s, which noted payments into the pension funds for Chicago’s police and firefighters will have to climb from $467 million in 2014 to $1.2 billion in 2015 to comply with state law.
Moody’s wrote the Emanuel administration has “made efforts to reduce costs and achieve operational efficiencies,” but added, “the magnitude of the city’s pension obligations has precluded any meaningful financial improvements.”
Shuttered Schools, Angry Teachers
The cost-cutting efforts include the closing of 49 of the city’s public schools and recent layoffs of more than 3,000 teachers and other school personnel, moves that have been met with animosity from the local teachers union and neighborhood groups that object to losing neighborhood schools.
Emanuel has also bucked local government worker unions by proposing to phase out the city’s subsidies for retirees’ health insurance. Those subsidies this year will cost more than $190 million. Emanuel proposes to transition all but the oldest retirees into the Obamacare insurance program starting in 2014.
Illinois, where Chicago is located, has its own pension and related fiscal problems and now carries the worst credit rating among the 50 states. The state’s unfunded pension liabilities are conservatively estimated at $100 billion, though some independent analysts say the true figure could be double that amount.