By Aaron Kuriloff
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.
"While Chicago's financial crisis is very real and at our
doorsteps, today's irresponsible decision by Moody's to downgrade
the city's credit by two steps goes far beyond that reality," Mr.
Emanuel said.
Howard Cure, director of municipal research at Evercore Wealth
Management in New York, said his firm has been avoiding Chicago
general-obligation bonds "for a while." But he said he was
surprised Moody's cut the city's rating low enough to place it in
junk territory.
"It's not as if the city's economy is doing badly," Mr. Cure
said. "They're actually gaining population and having growth
downtown. They have some big-city problems, but it's not a Detroit
situation."
Mike Cherney and Timothy W. Martin contributed to this
article.
Write to Aaron Kuriloff at AARON.KURILOFF@wsj.com
Access Investor Kit for Moody's Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US6153691059