Moody's downgrades Chicago to junk

Moody's has stripped Chicago of its investment grade rating over its yawning pension plan deficit, potentially triggering up to $2.2bn of claims and setting back mayor Rahm Emanuel's efforts to turn around the finances of America's third-biggest city.

The credit rating agency lowered its grade on the city's debt by two notches - from Baa2 to Ba1, a rung often called "junk" - after a ruling from the Illinois Supreme Court last week limited both Chicago's and the state of Illinois's ability to handle unfunded pension plans.

Mayor Emanuel, re-elected in April after a close campaign, savaged the Moody's downgrade as "irresponsible", arguing that it did not take into account Chicago's "growing economy [and] progress we have made on our legacy financial liabilities".

The relegation affects $8.9bn of general obligation, sales and motor fuel tax-backed debt. Moody's kept a negative outlook on Chicago's rating, indicating that it could lower its rating further into junk territory.

"Whether or not the current statutes that govern Chicago's pension plans stand, we expect the costs of servicing Chicago's unfunded liabilities will grow, placing significant strain on the city's financial operations absent commensurate growth in revenue," Matthew Butler, a Moody's analyst, said in the report.

The downgrade to junk will exacerbate Chicago's financial difficulties. Although municipal bond investors will not be forced to sell their holdings as Standard & Poor's and Fitch still rate the city investment grade, Moody's noted that its move could give lenders and counterparties on other financial deals the option to demand up to $2.2bn in accelerated principal, interest and termination fees.

"This action by Moody's is not only premature, but it is irresponsible to play politics with Chicago's financial future by pushing the city to increase taxes on residents without reform," Mr Emanuel said in a statement.

He added: "I am committed to focus on both reform and revenue to address Chicago's fiscal crisis, and we will continue our work in Springfield and with our partners in labour to ensure we will always meet our obligations, protect the retirements of our workforce [and] continue to deliver vital city services, while protecting our taxpayers."

Mr Emanuel made his ability to steer the city through tough financial waters the centrepiece of his recent re-election campaign, which saw a relatively unknown rival draw the high-profile Democrat into a run-off.

The mayor often touts the deals he has struck with two of the city's four employee pension funds as evidence of his ability to persuade labour to accept some cuts. But the recent Illinois Supreme Court ruling that struck down a 2013 state pension law raises questions about whether his pension deals can withstand legal challenges under a state constitution that treats employee benefits as sacrosanct.

The Illinois Supreme Court decision was expected, but has still weighed further on bonds in the state since the ruling was made last Friday.

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