Moody's Cuts Chicago Bond Rating to Junk

The shockingly bad fiscal health of Chicago just got a lot worse. Not only were Chicago Teachers "Insulted by a 7% Pay Cut Offer", the Illinois Supreme Court ruled Illinois' 2013 pension reform is unconstitutional.

Moody's Cuts Chicago Bond Rating to Junk

As a result of the Supreme Court ruling, Illinois' already horrendously underfunded pension plans are even more underfunded.

In a decision today, citing pension analysis, Chicago Rating Cut to Junk by Moody’s.

Chicago had its credit rating cut to junk by Moody’s Investors Service after the Illinois Supreme Court’s rejection of a state pension-overhaul plan reduced the city’s options for fixing its own underfunded system.

The two-level downgrade to Ba1 affects $8.1 billion of general obligations, which were already the lowest-rated among the 90 biggest U.S. cities, excluding Detroit. The outlook is still negative. Moody’s has dropped the city seven levels since July 2013.

The reduction to the highest level of junk “incorporates expected growth in the city’s highly elevated unfunded pension liabilities,” Moody’s said Tuesday. After the May 8 court ruling, “we believe that the city’s options for curbing growth in its own unfunded pension liabilities have narrowed considerably.”

The deterioration in the credit standing of the third-most-populous U.S. city underscores how pension promises are squeezing the finances of states and localities nationwide. Moody’s downgrade compounds Chicago’s fiscal struggles: its counterparties can immediately demand as much as $2.2 billion in accelerated principal, accrued interest and termination fees, New York-based Moody’s said in the report.

The company’s decision may raise borrowing costs in the $3.6 trillion municipal market: The city of 2.7 million was planning to issue about $383 million of bonds as soon as next week, data compiled by Bloomberg show. Some investors had already deemed its bonds speculative grade.

While Chicago’s financial crisis is very real and at our doorsteps, today’s irresponsible decision by Moody’s to downgrade the city’s credit by two steps goes far beyond that reality,” Mayor Rahm Emanuel said in a statement.

Irresponsible to Tell the Truth

Apparently it's irresponsible to tell the truth: Chicago is broke and its pension system is insolvent.

The Chicago Board of Education (CBOE) is already on the hook for $600 million in various termination fees when the CBOE debt was downgraded. Now the city itself is junk, and rightfully so.

If Emanuel disagrees, then what are his ideas to fix the problem?

Oh, I remember, Emanuel wants the state to bail out the CBOE.

Here's a question I keep asking: How is a state that has a $9 Billion Budget Deficit Hole going to bail out a single school district that is $1.5 billion in the hole?

Want another Emanuel idea? If so I have one: Emanuel hopeful Chicago pension reforms will survive even though state's didn't.

The “handwriting is on the wall” for Chicago’s plan to save two of four city employee pension funds, but Mayor Rahm Emanuel didn’t want to see it Friday.

Hours after the Illinois Supreme Court unanimously overturned state pension reforms, Emanuel argued that his plan to raise employee contributions by 29 percent and sharply reduce cost-of-living benefits to save the Municipal Employees and Laborers pension funds stands a better chance of survival.

He refused to discuss the “catastrophic outcome” that awaits Chicago if he’s wrong.

“Options for saving the defined benefit plans are now clearly limited. But a constitutional amendment to clarify what future benefits can be changed is definitely in order, as is taxing retirement income and other changes to benefit state and local government,” said Civic Federation President Laurence Msall.

At the earliest, the Illinois General Assembly could put a constitutional amendment on the ballot in November 2016. But even if it passes, it would affect only future retirees.

In the meantime, Msall said Emanuel should get to work with the new City Council on a cost-cutting and revenue-raising plan to fund pensions without jeopardizing essential services.

The combined, $30 billion pension crisis at the city and public schools has already dropped the city’s bond rating to just two levels above junk status.

Emanuel's Backup Plan?

Emanuel does not have a backup plan. I do.

On May 8, and in regards to the Illinois Supreme Court ruling, I stated "Today's ruling more than ever shows the need to pass a bankruptcy law."

And the state as a whole needs a constitutional amendment to allow pension cuts even if that only affects decisions going forward.

Apparently Moody's agrees.

Read next: Financial Stress Is Rising – Time to Worry?

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