CHICAGO, Sept 11 Chicago and a Michigan school district fared the worst among 29 local governments and school systems reviewed by Moody's Investors Service using a new approach to measuring public pension obligations.
According to data released by the credit rating agency on Wednesday, the general obligation ratings of Chicago and the Carman-Ainsworth Community Schools fell three notches to A3, just a step above the triple-B category.
The review, which Moody's launched in April, resulted in 18 rating downgrades, with the majority of the ratings falling one notch. Ratings for Virginia, Minnesota, and Michigan's Fruitport Community School District were dropped two notches.
The 29 municipal issuers, which collectively have $12.5 billion of debt outstanding, were placed on review for potential downgrades because they have large pension liabilities relative to their particular credit ratings, Moody's said.
With $8.2 billion of debt, Chicago was the biggest debt issuer reviewed by Moody's, which attributed the downgrade announced July 17 to the city's "very large and growing pension liabilities and accelerating budget pressures associated with those liabilities." The rating agency also put a negative outlook on the lower rating, saying the city faces formidable legal and political challenges to enacting pension reforms.
Chicago's pension payment is slated to jump by nearly $590 million to a projected $1.07 billion in 2015 under current Illinois law and the city needs state legislative action to change pension benefits in order to reduce costs.
Tim Blake, a Moody's analyst, said the action on Chicago's rating led to downgrades of ratings for Cook County, the Cook County Forest Preserve District, the Chicago Park District, the Chicago Public Schools and the Metropolitan Water Reclamation District partly because they share the same tax base with Chicago.
"There was the issue of overlapping (pension and debt) burdens on taxpayers," he said. "We feel the overlapping is heavier than anywhere else."
Other notable downgrades that resulted from Moody's review included Minneapolis, which had its triple-A rating sliced to Aa1 with a stable outlook. Top ratings for Chicago suburbs of Evanston and Elk Grove also fell a notch to Aa1, while Cincinnati's rating was downgraded to Aa2 from Aa1. Portland, Oregon, meanwhile, remained at Aaa.
Moody's has said its new approach adjusts pension data provided by U.S. state and local governments to create "greater transparency and comparability." It also said that pension liabilities have increased over the past 10 years, leading to rating downgrades and outlook changes.
The rating agency last month proposed changes that would give greater weight to pensions in its rating system for GO bonds sold by local governments. If adopted, the changes will likely cause more rating changes for governments rated by Moody's, Blake said.