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.