UPDATE 1-Moody's downgrades Chicago's GO rating to Baa1 over pension woes

Tue Mar 4, 2014 8:51pm EST

CHICAGO, March 4 (Reuters) - Chicago's massive and growing unfunded public pension liability remains a threat to the city's fiscal solvency, according to Moody's Investors Service, which cut the city's general obligation and sales tax revenue bond ratings one notch to Baa1 from A3 on Tuesday.

The rating downgrades, which affect $8.3 billion of debt, marked the second for the city by Moody's in less than eight months. Last July, the ratings agency dropped Chicago's GO and sales tax revenue ratings three notches to A3 from Aa3, also citing pension woes and related budget pressures.

The city, which is facing a $600 million state-mandated jump in payments to two of its four retirement systems next year, has been looking to the Illinois Legislature to enact cost-savings pension reforms or to curtail the looming payment.

But Moody's noted that any cost savings "will not alleviate the need for substantial new revenue and fiscal adjustments in order to meet the city's long-deferred pension funding needs."

The ratings agency said the city's cumulative underfunding of its pensions on an actuarial basis topped $7 billion from fiscal 2003 to fiscal 2014.

There is also the hurdle of litigation over reforms, which Moody's said would be "near certain" to happen. Illinois, which passed comprehensive changes to its own pension systems in December, faces four lawsuits challenging the reform law on state constitutional grounds.

Moody's said Chicago could be hit with another downgrade if Illinois' reforms are ruled to be unconstitutional and if the city continues to be unwilling "to raise tax revenue in amounts sufficient to fund annual pension contributions in line with actuarial standards."

Mayor Rahm Emanuel warned in his budget speech in October that without some relief from the state the city faces doubling its property tax or eliminating vital services. Chicago Chief Financial Officer Lois Scott echoed that warning in the wake of the downgrade.

"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," she said.

Chicago has planned a $405 million GO bond sale for next week through Wells Fargo Securities.

Moody's also downgraded the city's water and sewer senior lien revenue bond ratings to A2 from A1, and water and sewer second lien revenue bond ratings to A3 from A2, affecting $3.3 billion of debt.

The outlook on the lowered ratings is negative, Moody's said.

"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," Moody's said in a statement.