July 18, 2013 / 2:31 AM / in 4 years

UPDATE 1-Moody's cuts rating on Chicago's bonds, cites pensions

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CHICAGO, July 17 (Reuters) - Moody's Investors Service lowered on Wednesday Chicago's general obligation and sales tax ratings to A3 from Aa3 due to the city's large and growing pension liabilities and budget pressures related to them.

The move affects $8.2 billion of Chicago's general obligation and sales tax debt, Moody's said in a statement, adding that its outlook is negative.

"The current administration has made efforts to reduce costs and achieve operational efficiencies, but the magnitude of the city's pension obligations has precluded any meaningful financial improvements," Moody's said.

The credit rating agency added that its negative outlook is based on the "dramatic spike in annual pension payments scheduled to take effect in the 2015 budget year."

Moody's said it expects the payments "will place material strain on the city's operating budget."

"The outlook incorporates the likelihood of continued growth in unfunded liabilities in the city's four pension plans given currently suppressed contributions from the city," Moody's added, noting its outlook also takes into account Illinois' constitutional protection of pension benefits.

"Given this framework, in order for the city to realize any significant alleviation in pension costs, the Illinois General Assembly would need to enact pension reform legislation that ultimately withstands inevitable litigation," Moody's said.

Illinois lawmakers are struggling to solve the state's own $100 billion unfunded pension crisis, forcing local pension problems to the sidelines.

Continued failure to enact pension reform has helped push Illinois' credit ratings to the lowest level among U.S. states.

Moody's also lowered its rating on Chicago's water and sewer senior lien bonds to A1 from Aa2 and its rating on the city's second lien bonds to A2 from Aa3, which affects $3.3 billion of debt. The rating agency's outlook on the debt is negative.

"This confirms what I have been saying for more than a year," Chicago Mayor Rahm Emanuel said in a statement. "Without comprehensive pension relief from Springfield, municipalities such as Chicago will continue to receive negative reviews from rating agencies."

"Since I became Mayor, I have used every tool available to tackle and reform government, strengthen our financial position, and invest in our City's future," he added. "The pension crisis that is nearing our doorstep puts all of those investments at risk."

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