Moody’s revises Chicago’s rating outlook to positive

Moody’s Investors Service has lifted Chicago’s rating outlook to positive from stable and affirmed its bond ratings.

The rating agency in its action late Friday affirmed the city’s Baa3 issuer rating; the Baa3 rating on Chicago’s general obligation unlimited tax debt; the Baa1 rating on Chicago’s revenue bonds; and the Baa1 rating on senior lien sewer bonds. As of Dec. 31, 2022, the city had about $29.5 billion in debt outstanding.

Moody’s also revised to positive from stable the outlook on Chicago’s Sewer Enterprise and Water Enterprise.

The rating agency cited stronger pension contribution practices and upward movement in the city’s financial position. It also said it expects the city’s reserves will stay stable to growing going forward.

The positive rating action comes 14 months after Moody’s restored the city to investment grade. The city had spent more than seven years with a speculative-grade Ba1 rating from Moody’s after a 2015 downgrade.

“It is our expectation that the city will adhere to its pension funding policy, which targets controlling the growth in the reported net pension liability, for the foreseeable future even if the cost to adhere to the policy grows,” Moody’s said in a statement.

Moody’s Vice President David Levett said Chicago’s biggest credit challenges are its “very high” fixed costs and leverage ratios which are elevated largely due to its unfunded pension liabilities and debt.

“Chicago’s pension costs will be heavily influenced by numerous factors, including but not limited to the pace of active employee benefit accruals, the performance of its pension investments and potential future changes to benefit formulas,” Levett said. “Under the pension funding policy, for example, the city will respond to investment losses with higher contributions and more quickly than under its statutory requirement because there is neither asset smoothing nor any negative amortization of the reported unfunded liability.”

In that way, he said, the city boosts its asset accumulation prospects by contributing more sooner than the statutory minimum requires. 

Yet the Moody’s rating action also pointed to the city’s revenue base as a source of concern. Specifically, Levett said, Chicago’s revenue base is dominated by sales tax revenue, recreation tax revenue, transportation tax revenue, amusement tax revenue, gambling revenues and business tax revenue, among others – all of which might be impacted by an economic downturn.

“The city is vulnerable to an economic slowdown because its revenue base includes a substantial amount of economically sensitive revenue and its fixed costs ratio (implied debt service, pension tread water and other post-employment expenses) of 36% constrains expenditure flexibility,” Moody’s said.

Still, Moody’s noted that the city’s financial operations are buoyed by “organic revenue growth.” That growth stems from increases in sales tax, recreation tax, transportation tax, amusement tax and intergovernmental tax revenues.

Fitch Ratings upgraded Chicago’s GO rating to BBB-plus from BBB in October.

S&P Global Ratings revised Chicago’s outlook to positive from stable in November 2022, and affirmed its rating of BBB-plus on Chicago’s GOs. Kroll Bond Rating Agency revised its outlook on the city’s A GO bond rating to positive from stable around the same time.