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Bonds News

Pension funding to weigh on Chicago's credit rating -S&P

CHICAGO, Nov 21 (Reuters) - Chicago will maintain its low-investment grade rating with its fiscal 2017 budget that reduces a chronic deficit, but the city still faces pressures on its credit quality due to pensions and other expenses, S&P Global Ratings said on Monday.

The spending plan for the fiscal year that begins Jan. 1 reduces Chicago’s structural deficit to $137 million, the lowest gap since 2011, S&P said in a report. While the budget incorporates increased revenue as part of a plan to bolster the city’s four pension funds, that plan could be threatened by poor investment returns by the retirement systems, the report added.

The city’s pension costs are expected to increase starting in 2022, when its payments will be based on the plan’s goal of bringing the systems to a 90 percent funded level over 40 years.

“Credit quality could be threatened if the measures taken to date by the city prove insufficient to achieve structurally balanced budgets in the next two years,” S&P said.

Credit ratings for the nation’s third-largest city have been deteriorating due largely to an unfunded pension liability that stood at $33.8 billion at the end of fiscal 2015.

S&P cited factors including unplanned pension funding increases, public safety expenses, and a raise on reserve funds for operating expenses, that could weaken the city’s BBB-plus general obligation rating.

Mayor Rahm Emanuel’s $3.7 billion operating budget passed by the city council last week includes the first phase of hiring more than 900 police officers. That expense comes after the council previously enacted major tax and fee increases for pensions.

“We expect the city will structurally accommodate the added expense of the additional new hires in upcoming budgets, without sacrificing reserves or relying on other one-time budget actions, and without widening the initial budget gap,” said S&P, which revised Chicago’s rating outlook to stable from negative in October. (Reporting by Karen Pierog; Editing by Matthew Lewis)

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