Fitch Ratings downgraded Chicago’s credit to the lowest investment grade levels after the Illinois Supreme Court shot down Mayor Rahm Emanuel’s plan to cut pension benefits for some city workers last week.
Chicago received a two-step downgrade from Fitch Monday, bringing the city’s credit rating to BBB-, one step above a junk rating.
The downgrade was precipitated by last week's decision by the Illinois Supreme Court’s to strike down Emanuel’s pension plan.
“Fitch believes last week's Illinois Supreme Court ruling striking down pension reform legislation for two of the city of Chicago's four pension plans was among the worst of the possible outcomes for the city's credit quality,” a release from the ratings organization said. “Not only did it strike down the pension reform legislation in its entirety, but it made clear that the city bears responsibility to fund the promised pension benefits, even if the pension funds become insolvent.”
The 5-0 decision, with two justices abstaining, means nearly 80,000 active and retired city workers will not see changes to their pensions.
Nevertheless, the mayor’s office remained positive about the looming downgrade.
“Mayor Emanuel has demonstrated the resolve necessary to address our financial challenges head on and put Chicago on a path to long-term financial stability from passing the 2016 Budget to converting the City’s variable-rate debt to fixed-rate debt,” Chicago’s Chief Financial Officer Carole Brown said in a statement. “And as Fitch Ratings points out, ‘Chicago's financial profile has markedly improved in recent years.’”
“The decision by the Illinois Supreme Court is disappointing, but the City’s ability to pay our debt and meet our current commitment to the pension funds has not changed,” Brown added.
The mayor won re-election in 2015, arguing his pension plan was constitutional and would save money.
But Chicago kept drowning in red ink as a result of the city's pensions, necessitating a record $588 million property tax hike approved by the Chicago City Council in October.
An additional $170 million property increase to fund teacher pensions is on the horizon.
Chicago has the second-worst credit rating of any major U.S. city. The once-bankrupt Detroit currently has the worst rating.
The downgrade will affect certain city obligations including $9.8 billion in unlimited tax general obligation (ULTGO) bonds and $468 million in sales tax revenue bonds.