February 27, 2015 / 3:35 PM / 4 years ago

UPDATE 1-Moody's drops Chicago rating to Baa2, citing pension costs

(Adds details of rating downgrades, background on city’s fiscal problems)

CHICAGO, Feb 27 (Reuters) - Moody’s Investors Service on Friday cut Chicago’s already-weak credit rating one notch to Baa2, citing the city’s growing costs related to its big unfunded pension liability.

The credit rating agency also kept a negative outlook on the lower rating based on the expectation that pensions will exert increased pressure on Chicago’s operating budget.

The downgrade to Baa2, which is just two notches above the junk level, affects $8.3 billion of Chicago’s general obligation bonds.

Moody’s warned the rating could fall further if Illinois courts find pension reform laws enacted to shore up the state’s financially ailing pension system and for two of Chicago’s retirement systems are unconstitutional.

Public labor unions and retirees are challenging the laws passed by the Illinois Legislature in 2013 and 2014, claiming they violate a state constitutional prohibition against impairing retirement benefits for public-sector workers.

The Illinois Supreme Court will hear oral arguments over the law affecting state pension funds on March 11, with a ruling expected later this spring. Lawsuits against Chicago’s law were put on hold last week by a Cook County Circuit Court judge pending a ruling by the high court.

Chicago’s chief financial officer, Lois Scott, testified in Cook County court earlier this month that further credit rating downgrades could lead to a potential fiscal free fall by pumping up interest rates on new bonds and thinning the ranks of potential investors and credit providers. Lower ratings could also trigger termination of interest-rate hedges and letters of credit on existing variable-rate bonds, costing Chicago hundreds of millions of dollars.

Moody’s also cut the ratings on $542 million of sales tax revenue debt and $268 million of motor fuel tax revenue bonds to Baa2 from Baa1. The rating on $1.5 billion of second lien sewer revenue bonds fell to Baa1 from A3 and the rating on $35.2 million of senior lien sewer bonds was dropped to A3 from A2.

The ratings on $2.3 billion of Chicago’s water revenue bonds were affirmed at A2 and A3. (Reporting by Karen Pierog; editing by Matthew Lewis)

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