KBRA Assigns Long-Term Rating of A to the City of Chicago General Obligation Bonds, Series 2024A; Outlook Revised to Stable from Positive
29 Jul 2024 | New York
KBRA assigns a long-term rating of A to the City of Chicago General Obligation Bonds, Series 2024A. The Outlook has been revised to Stable from Positive.
Concurrently, KBRA affirms the long-term rating of A on the City of Chicago’s outstanding General Obligation Bonds and revises the Outlook to Stable from Positive. The Outlook revision reflects increased uncertainties with respect to the impact of more recent budgetary pressures that have been exacerbated by asylum seeker spending needs, sharply elevated fixed costs, depletion of COVID era federal recovery funds and the likelihood of increased pension liabilities due to Tier 2 and Tier 3 adjustments. The revenue base relies on economically sensitive sources, and while several revenue enhancement options are under consideration, action remains to be taken. Overall, progress toward structural balance has not kept pace with KBRA’s expectations, and sizable out-year gaps remain to be closed.
The long-term rating continues to reflect the City’s deep and diverse economy, a favorable track record of enacting appropriate budgetary actions, and an improved revenue environment, all of which have contributed to closure of annual budget gaps, albeit with continued use of non-recurring revenue sources. The City’s high fixed cost burden, attributable to debt and pension funding requirements, may potentially crowd out future spending for other governmental responsibilities, although KBRA acknowledges progress in addressing severe pension funding deficiencies.
Key Credit Considerations
Credit Positives
- The City’s substantial tax base and deep, diverse economic base reflect its position as the nation’s third largest city, and its role as a regional center for a large surrounding area.
- Management structure and policies provide a supportive framework for managing debt and financial operations.
- Ample available reserve balances supplement General Fund reserves and liquidity position.
Credit Challenges
- There is a need to identify significant long-term funding sources, as pension funding is now on an actuarial schedule and the increasing fixed asset burden risks crowding out other spending.
- Continued reliance on economically sensitive revenue sources poses ongoing budgetary uncertainty.
- Slow bond amortization due to prior use of "scoop and toss" debt restructurings to augment operating resources.
Rating Sensitivities
For Upgrade
- Dedication of specific revenue sources to meet actuarial pension requirements for all four pension funds.
- Improved debt ratios, reflecting sustained modernization of borrowing by the City and overlapping jurisdictions, and continued resource base expansion.
For Downgrade
- Use of Chicago Skyway and parking meter asset and concession lease reserves to offset future budgetary gaps.
- Failure to adhere to established financial and debt policies.
- Inability to effectively accommodate actuarial pension funding requirements.
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