Standard & Poor’s reaffirms ‘negative outlook’ for city bonds
BY FRAN SPIELMAN City Hall Reporter February 25, 2014 1:06PM
Updated: February 25, 2014 5:16PM
Standard & Poor’s has reaffirmed Chicago’s A-plus general obligation bond rating with a “negative outlook,” citing the city’s looming pension crisis, its “political unwillingness to raise property taxes” and its “limited capacity to cut spending” because 63 percent of it is tied to public safety.
In 2015, the city is required by state law to make a $600 million contribution to stabilize police and fire pension funds that now have assets to cover just 30.5 percent and 25 percent of their respective liabilities.
Mayor Rahm Emanuel wants the Illinois General Assembly to put off the balloon payment until 2023. That would give the city time to negotiate a painful mix of employee concessions and increased revenues without raising property taxes so high that it triggers an exodus to the suburbs.
In its new report this week, Standard & Poor’s noted that decisions about how to fund the $600 million payment must be made later this year “if the revenues are to be realized in time” to meet the state deadline.
Even if the Illinois General Assembly lifts the hammer hanging over the heads of Chicago taxpayers by allowing the city to “smooth out the contributions,” the increased costs will be an “impediment to significant future budget surpluses,” the rating agency said.
“Although the city has taxing flexibility owing to its home-rule status, it has not historically availed itself of that flexibility,” Standard & Poor’s said.
“Hindering budget flexibility is a political unwillingness historically to raise property taxes to meet budgetary challenges, particularly with respect to looming pension payment increases. In our view, the city also has a limited capacity to cut spending, given that nearly two-thirds of 2012 general fund expenses were in the area of public safety.”
Fitch Ratings also reaffirmed its A-minus rating with a negative outlook this week. City Hall is still waiting for a verdict from Moody’s Investors.
In an emailed statement, Chief Financial Officer Lois Scott said she was “pleased” that S&P and Fitch “reaffirmed” Chicago’s ratings and recognized the “strong management steps” the city has taken to “achieve structural budget reform while protecting and building the city’s long-term reserves.”
But, she said, “Our significant progress . . . is compromised by the lack of pension reform which has a direct impact on our City’s financial security. Our workers deserve a pension system that will be there for them today and years into the future, and our taxpayers cannot afford to bear the entire burden alone.”
Last summer, Moody’s ordered an unprecedented triple-drop in the city’s bond rating, citing Chicago’s “very large and growing” pension liabilities, “significant” debt service payments, “unrelenting public safety demands” and historic reluctance to raise local taxes that has continued under Emanuel.
In September, Standard & Poor’s cited those same factors for changing its outlook to negative on Chicago’s A-plus rating.
“The outlook change reflects our view of the risks involved in how the city will address its upcoming large pension payments,” S&P credit analyst Helen Samuelson was quoted as saying then.
In its new report, S&P noted that Chicago has a “very weak debt and contingent liabilities position, driven mostly by the city’s high net direct” debt.
“The city’s budgetary performance, in our view, has been very weak overall for the past four fiscal years and it continues to face significant challenges,” the report states.
Standard & Poor’s noted that former Mayor Richard M. Daley balanced his last three spending plans with “one-shot budget-balancing maneuvers, including large transfers in from the service concession reserve fund” that includes proceeds from the widely despised 75-year, $1.15 billion parking meter lease.
The A-plus rating and negative outlook applies to the first $450 million of $900 million in general obligation debt approved by the City Council earlier this month.
The money will be used to refinance old debt, pay for equipment and capital projects and bankroll $100 million in legal settlements incurred last year.