Don’t let Chicago’s crisis go to waste
Moody’s cracked the whip and downgraded the rating of Chicago’s general obligation bonds to Baa1 from A3 this week. It’s only a one-notch downgrade, but no American city should wear the scarlet letter of BBB. Chicago’s Mayor Rahm Emanuel is seemingly frozen in place and having a tough time addressing the city’s fiscal problems. His behavior belies his famous 2009 quip to never let a serious crisis go to waste.
Moody’s in its rating comment about the city’s $8.3 billion general obligation and sales tax debt seems to think Chicago is in pretty rough shape:
The negative outlook reflects our expectation that, absent a commitment to significantly increase revenue and/or materially restructure accrued pension liabilities to reduce costs, the city’s credit quality will likely weaken. The formidable legal and political barriers to these actions are incorporated in the outlook.
The State of Illinois’s constitutional protection of pension benefits raises the possibility that any attempt to reduce accrued benefits will be litigated by plan members. Ongoing unwillingness to sufficiently increase revenue ensures that annual pension payments will remain a considerable operating stress while continuing to fall well below actuarially sound contributions.
As such, the city’s financial operations will remain structurally imbalanced and the long-term solvency of the city’s pension funds will be exposed to a significant degree of asset return risk.
Moody’s translation: either raise taxes or confront the unions and get pension costs under control so the city can afford to make its required pension contributions.
Meanwhile, Emanuel was outed by the Chicago Sun-Times for his interest in expanding Chicago’s Soldier Field in a bid to attract the 2019 Super Bowl. His critics lacerated him:
[Civic Federation President Laurence] Msall noted that the Moody’s downgrade — from A3 to Baa1 with a negative outlook — leaves Chicago with the ‘worst-rated credit of any major municipality in the United States’ except bankrupt Detroit.
‘Chicago needs to prioritize its financial actions and the top priority has to be addressing the pension crisis. Articulating to the Legislature or other units of government any other priorities conflicts with the immediate crisis in the city’s finances expressed by Moody’s downgrade,’ Msall said.
‘It’s hard to see how the expansion of Soldier Field will effectively address the city’s immediate financial crisis. It may have benefits to the Chicago Bears and the tourism industry. But, the construction and benefits from that are much farther off than the immediate costs of continued inaction on the city’s pension and financial challenges.’
Emanuel said it’s way too soon to determine how a Soldier Field expansion would be financed or how much debt it would require the city to issue.
Meanwhile, muniland trading in Chicago’s bonds took a small hit, according to Adam Buchanan, Institutional Sales and Trading Vice President at Ziegler Capital Markets in Chicago:
‘The City of Chicago Moody’s GO downgrade to ‘Baa1’ negative outlook resulted in institutional blocks of bonds trading off roughly 20 to 25 basis points. The downgrade and negative outlook will clearly increase their cost of capital on next week’s $400M issue. Further frustrating for the City of Chicago is their market timing for next week’s issue is actually excellent, as the new issue market needs supply of all kind. The city had an opportunity to secure historically cheap, committed, long term capital had they avoided the downgrade.’
According to Buchanan, Chicago’s cost of borrowing wasn’t helped with the Moody’s downgrade. Emanuel has to follow his own advice and not let Chicago’s current crisis go to waste.