March 6, 2014. Chicago. The Windy City appears determined to ignore reality and crash full speed into financial oblivion. That’s the sense Moody’s rating agency and the city’s news outlets gave Tuesday. The major credit institution downgraded Chicago’s bond rating, ironically, on the very same day the Chicago City Council’s Finance Committee voted to spend $55 million on a luxury hotel with hundreds of millions more to follow for a basketball stadium.
Moody's recalculated Chicago's unfunded pensions last year and discovered it was almost double what was reported. Image courtesy of Moody's Investors Service.
To watch Mayor Emanuel and the Chicago City Council spend money on hotels, stadiums and convention centers, one would never guess that the city’s had its credit rating downgraded four times just in the last eight months. And each time, city officials scoff at the notion that all three of the world’s most authoritative experts on the subject could be right and Chicago’s financial wizards could be wrong.
Downgrade #1 – July 2013 (Moody’s)
Following a warning from Fitch ratings the month before, Moody’s did the unthinkable in July and downgraded Chicago’s credit rating three full notches to A3. That’s the lowest of the ‘A’ ratings, having fallen six ratings from the top. It’s also one level from a near ‘junk’ status that ‘B’ grades signify.
Downgrade #2 – September 2013 (S & P)
Two months later, S & P announced that while it was temporarily holding Chicago’s bond rating and A+, it was downgrading the city’s outlook from ‘Stable’ to ‘Negative’. The A+ rating is five downgrades from the top of S & P’s rating system with three more notches to go before it reaches the ‘B’ level, or near ‘junk’ status.
Downgrade #3 – November 2013 (Fitch)
Again, just two months later, Fitch ratings agency made good on its threat and downgraded Chicago’s bond rating from AA- to A-. That represents another three-level fall in one downgrade, stopping at the lowest ‘A’ rating Fitch has before descending into the dreaded ‘B’ level.
Downgrade #4 – March 2014 (Moody’s)
Following Moody’s massive triple-downgrade in July, the rating agency again downgraded Chicago’s credit rating two days ago from A3 to BAA1. The company also changed its official outlook to ‘Negative’.
Chicago city officials dismissed the news Tuesday saying they simply disagreed with the ratings agencies. Chicago’s Chief Financial Officer Lois Scott we reported in the Chicago Sun Times remarking, “While we disagree with the action taken today by Moody’s, we do agree that the city’s pension challenges will have a direct impact on its long-term financial stability without reform.”
Financial crisis - by the numbers
Over the course of eight months and four multi-level ratings downgrades, the country’s three ratings agencies have cited a laundry list of reasons Chicago’s financial outlook is in such dire shape. The most common reason noted is the city’s longtime resistance to doing the two things that could solve the problem - raise taxes, cut pension costs, or both.
Instead, city and state elected officials have taken small, insignificant steps that the ratings agencies insist are too little too late. Not that they do any good anyway. The government employees unions repeatedly sue and win back any cuts to their highly valuable pensions each time. Without their mutual consent to cut benefits, it won’t happen because of contract protections under the Illinois State Constitution. Nothing can change a pension contract except voluntary cuts or an official bankruptcy similar to Detroit.
When S & P lowered Chicago’s credit rating, it reported that the city’s residents were going to have to come up with more than an additional half billion dollars next year to satisfy their legal obligation to fund pensions. They note that in 2014, the city’s payment will be $483.4 million. In 2015, the payment will be over $1 billion. And in 2020, taxpayers will be paying $1.2 billion in pension costs for former government employees.
S & P also pointed out that Chicago’s unfunded pension liability has ballooned from $11.9 billion in 2009 to $19.4 billion in 2012. It also noted that most pension funds that are considered healthy are 80% paid for. Chicago’s four government employee pension funds are only funded at 35%, one of the worst levels in the country.
Fiscal insolvency and City Hall denials
When Moody’s downgraded the city’s rating on Tuesday, the agency cited the fact that Chicago’s $32 billion unfunded pension liability is eight-times the cities entire yearly revenue. That, they noted, is the worst of any municipality in America. And they weren’t shy about telling city officials that the measures they are dabbling with are nowhere near enough, “We expect that any cost savings of such reforms will not alleviate the need for substantial new revenue and fiscal adjustments in order to meet the city’s long-deferred pension funding needs.”
Moody’s also pointed out a cold, hard truth that Chicago elected officials simply refuse to acknowledge. Either massive tax increases or massive voluntary union pension cuts will have to be achieved to keep Chicago from going bankrupt sometime soon. Seemingly unbeknownst to Mayor Emanuel, he and Alderman Ed Burke don’t decide when the city becomes insolvent, the ratings agencies do. The instant Moody’s, S & P, and Fitch classify Chicago’s debt as ‘junk’ status, which could be the next step, Wall Street banks will stop issuing loans and buying the city’s bonds.
Next year, a $600 million mandatory contribution will need to be made by Chicagoans just to the city’s Police and Firemen’s pension funds. They’re currently only funded at 30% and 25% respectively. And Chicago’s unfunded pension liabilities pale in comparison to the State of Illinois’ unfunded pensions, which will also be paid mainly by Chicago and Cook County taxpayers. The state of Illinois currently owes an estimated $100 billion in unfunded pension payments. That’s the worst in the nation and is arguably closer to bankruptcy than the city of Chicago.
"The news shouldn't be left wing or right wing, conservative or liberal. It should be the news. It should be independent" - Mark Wachtler, Illinois Herald owner/editor
Chicago and Illinois Democrats have had an assortment of ideas for solving the pension shortfalls - none of which has worked, as the three ratings agencies so bluntly pointed out. Governor Quinn wants a compromise, any compromise. House Speaker Madigan wants the unions to accept voluntary pension cuts. Senate President Cullerton wants to take baby steps in the name of progress.
Local Aldermen have been demanding President Obama give the city a bailout the same way he repeatedly bailed out Wall Street. And Mayor Emanuel wants state lawmakers to pass a law that puts off Chicago’s mandatory pension payments until 2023, presumably when he’s back in Washington DC, comfortably serving out his second term as President of the United States.
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