Wednesday, May 13, 2015

Chicago's Bond Rating Downgraded By Moody's To Junk Bond Status

Unfunded pension liabilities are pushing both the City of Chicago and Illinois state government to the brink of insolvency. An Illinois Supreme Court ruling striking down as unconstitutional a pension reform law intended to curtail future benefits of state government pensioners sent shock waves that are reverberating in the credit market. Faced with the likelihood court challenges to pension changes made to Chicago's grossly-underfunded public pension systems will succeed, Moody's has decided to downgrade Chicago's bond rating to junk bond status. "The current rating actions give the counterparties of [the city's letters of credit, standby bond purchase agreement, lines of credit, direct bank loans and swap agreements] the option to immediately demand up to $2.2 billion in accelerated principal and accrued interest and associated termination fees," Moody's stated in its announcement today. Chicago's Mayor Rahm Emanuel reacted negatively to the downgraded bond rating.
“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. Their decision was driven solely by the overturning of a state pension bill that did not include Chicago’s pension reform, yet they did not downgrade the State of Illinois. Moody’s is out of step with other rating agencies – by as many as six steps – as they refuse to acknowledge Chicago’s growing economy, progress we have made on our legacy financial liabilities, balancing four budgets without raising property taxes while adding to our reserves, securing pension reforms for two of the City’s four funds to preserve and protect retirements for 61,000 employees that were previously in danger, and the progress we are now making with our partners in labor at the other two city funds. This action by Moody’s is not only premature, but it is irresponsible to play politics with Chicago’s financial future by pushing the City to increase taxes on residents without reform. I am committed to focus on both reform and revenue to address Chicago’s fiscal crisis, and we will continue our work in Springfield and with our partners in labor to ensure we will always meet our obligations, protect the retirements of our workforce, continue to deliver vital city services, while protecting our taxpayers.”
Who wants Illinois' and Chicago's unfunded pension liability worries over The Star's made-up stories about the damage Indiana is supposedly suffering from RFRA? The Illinois Supreme Court has given the Illinois legislature and governor very narrow options for dealing with the problem, actions which primarily require massive tax increases to shore up the fact that payouts to pensioners are exceeding contributions to pension plans. One conservative think tank asked Gov. Bruce Rauner to fire all state employees and give them the option of re-hiring only if they consent to a standard 401(k) contribution plan in place of the state's exorbitant pension plan, which includes 3% annual cost-of-living raises and significant contributions to health insurance premiums for retired workers. Some legal analysts say that doomsday approach would also likely be struck down as unconstitutional by the Illinois Supreme Court based on its recent decision overturning modest curtailment of benefits for future retirees.

9 comments:

Sir Hailstone said...

Is Chicago's pension separate from IMRF or is this all IMRF related?
And here I thought Daley the Younger's lease of the Skyway was supposed to go to shore up the City's contribution to the pension funds. Hmm. It didn't. Imagine that.

Gary R. Welsh said...

There are separate state and municipal pension funds involved here, although I suspect Chicago was always counting on the state for a bailout when it came up short. That's a bit of a challenge given the gravity of the state's unfunded pension liability.

Flogger said...

The sad part to all of this is the retirees who depended upon the expertise and honesty of the politicians and other parties to deliver on the pension promises.

Sir Hailstone said...

"The sad part to all of this is the retirees who depended upon the expertise and honesty of the politicians and other parties to deliver on the pension promises."

Same could be said for a lot of private sector industries and their pensions - steelworkers, miners and autoworkers for example.

Anonymous said...

They are following the Official Financial Plan of Democrats. That plan is their hallmark as seen by how it worked in Detroit.

Flogger said...

Sir Hailstone, my wife "lost" her pension also when her airline went bankrupt, reorganized and presto-chango-alcazam no more Pension. It was shoved off onto the Federal Government.

Marycatherine Barton said...

You can no longer rely on the Indianapolis Star. Sophie McAdam explains this fact in her article of Sept. 10, 2013 posted at TrueActivist.com:

"10 Compelling Reasons You Can Never Trust the Mainstream Media."

Sir Hailstone said...

"It was shoved off onto the Federal Government"

Ah yes the less-than-solvent PBGC.

Pete Boggs said...

Ostensibly (wink-wink), the federal blubber-mint took over GM to deal with "legacy" costs (pensions); while shelling bond holders in service to the union & orthodox statism.

Chicago is being treated with Dr. Detroit's "it takes a pillage" therapy, of economic destruction.