KBRA Downgrades the City of Chicago, IL General Obligation Bonds to BBB+; Assigns BBB+ Rating to the City's General Obligation Bonds, Taxable Series 2026A and General Obligation Bonds, Series 2026B. Outlook Remains Negative
25 Feb 2026 | New York
KBRA downgrades the long-term rating on the City of Chicago, IL General Obligation Bonds to BBB+. Concurrently, KBRA assigns a long-term rating of BBB+ to the City of Chicago, IL General Obligation Bonds, Taxable Series 2026A and General Obligation Bonds, Series 2026B. The Outlook remains Negative.
The rating downgrade reflects the City of Chicago’s (“the City’s) deteriorating fund balance, narrowing liquidity, and exceptionally high and rising fixed cost burden. These pressures limit financial flexibility and may impair the City’s ability to sustain advance pension contributions intended to stabilize the net pension liability and maintain progress along its statutory pension funding ramp.
The Negative Outlook reflects our view, reinforced by recent budget actions, that the City’s capacity to address its growing structural deficit through new recurring revenues and meaningful expenditure reforms is increasingly constrained. These limitations are likely to lead to greater reliance on one-time measures, an increased risk of mid-year budget adjustments, including in the current fiscal year, and greater budget deficits in FY 2027 and beyond.
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 substantial, growing tax base and diverse economic base.
- The funding of a fourth consecutive advance pension contribution, albeit in two equal tranches over the course of FY 2026, is an important step towards long-term pension funding stability.
Credit Challenges
- The City’s continued reliance on non-recurring and untested revenue sources, and its use of borrowing for operations calls into question whether meaningful new recurring revenues and structural expenditure reductions necessary for future budgetary balance can be achieved.
- Advance pension contributions, while credit positive in the long run, risk crowding out other Corporate Fund spending and exhausting fund balance in the short run, unless additional recurring funding sources are identified.
- The passage of the Illinois Public Safety Tier II Adjustment Act in 2025 worsened the City’s severely underfunded pension status, necessitating an increase in future advance pension payments.
Rating Sensitivities
For Upgrade
- Long-term revenue enhancements and spending reforms that address the City’s growing structural budget gap.
- Dedication of specific revenues 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.
- Further borrowing by the City for other than capital purposes.
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