Chicago not poised to go the way of
Send a link to a friend
[February 28, 2014]
By Karen Pierog
CHICAGO, Feb 27 (Reuters) - Standard &
Poor's Ratings Services posed the question on Thursday that has been
lingering in the minds of many in Chicago: Will significant budget
pressures put the city on the same path that led Detroit into
The answer, contained in a report by the credit rating agency, is
"We believe that Chicago's growing economy and taxing flexibility
provide it with the resources to avoid a fate similar to Detroit's
should it capitalize on this flexibility and remain on course," the
S&P gave Detroit its lowest credit rating of D after the city
defaulted on its general obligation bonds in October. Chicago's bond
rating remains solidly investment grade at A-plus, albeit with a
Chicago also has strong and stable management, while Detroit, which
is currently being run by a state-appointed emergency manager, has
suffered from "very weak" management over the years, according to
the report. Illinois' largest city, in contrast to Michigan's, has a
strong economic profile.
Both Midwest cities, however, are weak when it comes to outstanding
debt and pension liabilities. Debt service as a percentage of total
governmental spending was 12 percent in Chicago and 14 percent in
Detroit in 2012, S&P noted.
Detroit's emergency manager has pegged the city's unfunded pension
liability at $3.5 billion and is seeking cuts to retirement benefits
in federal bankruptcy court. Chicago's four pension systems are only
35 percent funded and the city is facing a state-mandated $600
million pension payment increase.
[to top of second column]
How Chicago deals with the higher payment could have an impact on
its debt profile and rating, S&P said.
"If Chicago substantially draws down its reserves in an effort to
increase its pension payments in line with state mandates rather
than raising taxes, it could lead to a downgrade," the report said.
S&P added that it believes "the magnitude of Chicago's budgetary
issues does not put it in the same league as Detroit."
[© 2014 Thomson Reuters. All rights
Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.