(Recasts; adds analyst comment, background)
July 8 (Reuters) - Standard & Poor’s Ratings Services cut Chicago’s credit rating one notch to BBB-plus with a negative outlook on Wednesday, citing the windy city’s nagging structural budget deficit and the lack of a plan to close it.
S&P analyst John Kenward said the U.S.’ third-largest city needs “a credible, public, detailed plan” to deal with budget gaps projected to grow to $588 million in fiscal 2017, largely due to escalating contributions to its police and fire fighter retirement funds.
S&P also warned Chicago’s general obligation bond rating may fall further if a credible plan does not surface within six months.
The downgrade comes as the city is preparing to issue about $1 billion of debt. S&P said the bond issuance is the final step in the city’s plan to convert its GO variable-rate debt to fixed rate.
“With this issuance, the city will take out all but $140 million of short-term debt from its lines of credit and (commercial paper) and convert it to fixed-rate, long-term debt,” S&P said in a report, adding that proceeds will also fund a contract claim, a leveraged lease termination, $170 million of debt restructuring and $120 million to $170 million in capitalized interest.
“As the city has always done to address budget deficits, we will roll out plans for addressing our legacy liabilities through the annual budget process so that we can continue to meet our obligations to workers, deliver vital city services, and protect our taxpayers,” Chicago Chief Financial Officer Carole Brown said in a statement regarding the S&P downgrade.
A downgrade of Chicago’s rating to junk by Moody’s Investors Service earlier this year triggered $2.2 billion in accelerated debt payments and fees that forced Chicago to undertake a restructuring of its outstanding bonds.
Chicago Mayor Rahm Emanuel announced last month that he would speed up the fiscal 2016 budget process, which would normally start in October. (Reporting by Tanvi Mehta in Bengaluru and Karen Pierog in Chicago; editing by Kirti Pandey and G Crosse)