KBRA Downgrades the City of Chicago, IL G.O. Rating to A-; Outlook is Negative
24 Jan 2025 | New York
KBRA has downgraded the long-term rating on the City of Chicago, IL General Obligation Bonds to A- (from A). The Outlook is Negative. The rating action, which resolves KBRA's November 12, 2024 Watch Downgrade designation, reflects our view that the City’s options for raising new, recurring revenues or materially reducing operating expenditures are extremely limited, likely necessitating continued reliance on one-time budgetary fixes, a practice we believe perpetuates Corporate Fund structural imbalance and risks compounding out-year shortfalls.
The rating continues to reflect the City’s substantial tax base, prominent role as a regional economic hub for the Midwest, and ample reserve and liquidity position. Offsetting these strengths are the magnitude of projected outyear budget gaps exacerbated by the expiration of COVID-era federal recovery funds, as well as growing pension and debt service costs that require increasing Corporate Fund contributions and crowd out other spending priorities.
The Negative Outlook reflects KBRA’s view that, absent new, permanent funding sources, revenues will not keep pace with burgeoning fixed costs, forcing further reliance on one-time solutions and exacerbating outyear budget gaps, projected at $1.1 billion for FY 2026 and $1.3 billion for FY 2027.
Key Credit Considerations
The rating was downgraded because of the following key credit considerations:
Credit Positives
- The City’s regional significance is reflected in its large, diverse economic and tax base.
- Ample available reserve balances supplement the City’s solid liquidity position.
- The funding of a third consecutive $272 million advance pension contribution, albeit from a one-time assigned fund balance, is an important and meaningful step towards long-term pension funding stability.
Credit Challenges
- Reliance on non-recurring revenues to meet programmatic expenses and plug budgetary shortfalls calls into question the City’s ongoing ability to meet its exceptionally high pension-driven fixed cost burden as well as growing personnel and other operating costs.
- The continuation of advance pension contributions made since 2023 to stabilize the NPL and prevent liquidation losses, while credit positive in the long run, risks crowding out other Corporate Fund spending in the short run, unless additional long-term funding sources are identified.
- Compounding the City’s severely underfunded pension status, the possibility of retroactive adjustments and increased future pension benefits exists should the pension system’s Tier 2 benefits fall out of compliance with IRS Safe Harbor Tests.
Rating Sensitivities
For Upgrade
- Long-term revenue enhancements and spending reforms that address the City’s growing structural budget gap.
- Dedication of specific revenues (in lieu of one-time assigned fund balance) to achieve actuarial pension funding requirements.
- Improved debt ratios, reflecting a sustained moderation of borrowing and continued expansion of the resource base.
For Downgrade
- Use of Chicago Skyway and parking meter asset and concession lease reserves to offset budgetary gaps.
- Failure to adhere to established financial and debt policies.
- Borrowing by the City for other than capital purposes.
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