Fitch downgrades credit rating of Chicago in wake of pension ruling
Mar 29, 2016 07:24 AM EDT
On Monday, Chicago had its credit rating cut to the lowest investment grade levels by Fitch Ratings after the Illinois Supreme Court abolished Mayor Rahm Emanuel's proposal to cut pension benefits for some city laborers last week.
According to NBC Chicago, the two-step downgrade, a rating closer to junk, affected $486 million of debt backed by sales tax and $9.8 billion of general-obligation bonds. The company said in a statement that the outlook is negative, which indicates that the rating could be lowered further in the future.
The step was precipitated by a March 24 decision of Illinois'' top court to strike down Emanuel's plan, which required the employees to boost contributions to the municipal and workers' retirement funds and cut any future increases in the cost-of-living.
The Chicago Tribune reported that the court ruled it violated safeguards to public pensions enshrined in the state's constitution, delineating the difficulty Chicago faces in reducing it $20 billion shortfalls in its retirement funds. With the two judges abstaining, the 5-0 decision means that nearly 80,000 active and retired laborers of the city will not see changes to their pensions.
Fitch described the ruling to be among the "worst of the possible outcomes" for the credit quality of the city, while sending a warning that the rating could be downgraded even more in the absence of a concrete and realistic plan that places the pension funds on an "affordable path toward solvency." Fitch also underlined that not only did the state's court tossed out the pension reform legislation in its entirety, but made clear that the city bears responsibility to fund the promised pension benefits.
The city of Chicago is already paying a premium to borrow in the US municipal bond market and could sell as much as $1.25 billion of GOD bonds this year, reports Reuters. Carole Brown, Chicago Chief Financial Officer, added that Mayor Rahm Emanuel has taken measures to address the financial challenges of the city, including the implementation of debt reforms.
Fitch also said in a statement that any plan to address pensions must rely on meaningful use of expenditure and revenue controls to hit higher annual payments.