|
 The downgrade of Chicago's $8.1 billion in general obligation debt
to "Ba1" could limit Mayor Rahm Emanuel's options as he seeks to
address a state-mandated $550 million increase in city pension
payments in 2016.
The only big U.S. city with a lower Moody's rating is Detroit, which
exited bankruptcy in December.
Emanuel lashed out at the rating agency, which said its records do
not show Chicago ever having junk rating before.
"This action by Moody's is not only premature, but it is
irresponsible to play politics with Chicago's financial future,"
said Emanuel, a Democrat.
Moody's said Chicago's options for curbing its $20 billion unfunded
pension liability "have narrowed considerably" after last week's
Illinois Supreme Court ruling invalidated a state pension reform
law.
The ruling signals that a separate law aimed at boosting funding for
Chicago's municipal and laborers' pension systems could meet the
same fate.
 Clint Krislov, the attorney representing retired city workers in one
of two lawsuits against the Chicago pension reform law, said he will
ask a judge on Wednesday for a summary judgment invalidating the
law.
Moody's said spending cuts and tax increases may be needed,
regardless of how the court rules. The state could force the city to
pay retirees directly, possibly leading to another rating cut,
Moody's warned.
"Chicago's unfunded liabilities will grow, placing significant
strain on the city's financial operations," Moody's said.
The city's GO rating with Moody's has been in a free fall, dropping
eight notches since 2010. The other two major rating agencies, Fitch
Ratings and Standard & Poor's, still rate Chicago in the single-A
investment-grade category.
Moody's on Tuesday also cut ratings on Chicago's sales tax, motor
fuel tax, and water and sewer revenue bonds.
Illinois Governor Bruce Rauner, a Republican, has ruled out a state
bailout for Chicago. Rauner recently said Illinois' largest city
could be headed to bankruptcy, although Illinois law does not allow
cities to file for bankruptcy.
[to top of second column] |
Chicago already is struggling with a $300 million structural budget
deficit and the looming $550 million increase for payments to police
and fire retirement funds. Emanuel has said he expects to seek state
legislation to restructure that payment, and the Moody's action
could increase pressure on Illinois lawmakers to reform pensions
statewide.
Emanuel late last month announced steps to clean up sometimes
controversial debt practices. Emanuel plans to spend about $200
million to eliminate swaps contracts used to hedge interest-rate
risk on variable-rate bonds.
The latest Moody's downgrade gives banks that provide credit support
and interest-rate swaps the right to demand a total of $2.2 billion
in accelerated principal, interest and termination payments from
Chicago, according to Moody's.
Chicago debt has been trading at huge spreads over the municipal
market's triple-A benchmark yield scale. Chicago's descent into junk
status could obligate managers of some high-quality muni funds to
dump the city's bonds, warned Dan Heckman, senior fixed-income
strategist at U.S. Bank Wealth Management.
“We would continue to urge investors to have an extreme level of
caution here,” Heckman said.
Bond investors seemed to take Chicago's decline into junk-bond
status in stride.
"They are still pretty far from … being in a default situation,"
said Dan Solender, a municipal portfolio manager at Lord Abbett,
which has minimal exposure to Chicago debt.
(Additional reporting by Megan Davies and Hilary Russ in New York;
Editing by David Greising and Lisa Shumaker)
[© 2015 Thomson Reuters. All rights
reserved.]
Copyright 2015 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
