Moody’s downgrades Chicago to junk-bond status in wake of pension ruling

Expect local-government finances across the state to spiral downward until politicians pass a constitutional amendment.

Update: Moody’s Investors Service hit the city with two additional, major downgrades on May 13, announcing three-notch drops to junk levels for the Chicago Board of Education and the Chicago Park District.  

Moody’s Investors Service downgraded Chicago’s credit rating two notches on May 12 to the non-investment grade “Ba1” level with a negative outlook from “Baa2.”

The downgrade affects bond issues backed by property, sales and motor-fuel tax revenue, and comes on the heels of the Illinois Supreme Court’s May 8 ruling disallowing modest reforms to government-worker pensions.

Moody’s attributed the downgrade to “expected growth in the city’s highly elevated unfunded pension liabilities.”

In the wake of the pension ruling, Moody’s analysts believe “the city’s options for curbing growth in its own unfunded pension liabilities have narrowed considerably,” adding:

“We expect the costs of servicing Chicago’s unfunded liabilities will grow, placing significant strain on the city’s financial operations absent commensurate growth in revenue and/or reductions in other expenditures. The magnitude of the budget adjustments that will be required of the city are significant.”

With this downgrade, Moody’s has now dropped Chicago’s credit rating seven notches in less than two years.

Because of the extreme nature of the Supreme Court’s ruling, a solution Illinois lawmakers will likely turn to is a constitutional amendment allowing the state to deal directly with its $111 billion unfunded pension liability.