Fitch Ratings upgrades Chicago, Cook Co. ahead of bond deals

Fitch Ratings upgraded Chicago and Cook County ahead of the city’s planned sale of $643 million general obligation bonds and the county’s $168.2 million of sales tax revenue bonds.

Chicago’s issuer default and GO debt rating were bumped to A-minus from BBB-plus and the city’s sales tax securitization bonds were raised to AAA from AA-plus by Fitch. The outlook is stable.

The city will sell $642.795 million of Series 2024A GO bonds to finance Chicago Works, the Chicago Recovery Plan and various other capital projects. The bonds will price the week of August 5 and are rated A-minus, Fitch said. Standard & Poor’s Global Ratings assigned a BBB-plus. Kroll Bond Rating Agency rates the bonds A and the outlook was revised to stable from positive.

The upgrade results from Fitch’s revised local government rating criteria, which assesses Chicago’s financial resilience at aaa due to its “high midrange” budget control and Fitch’s expectation the city will keep general fund available reserves at 10% of spending or higher.

“ In the past, rating agencies have undervalued the strength and potential of Chicago,” Chief Financial Officer Jill Jaworski told The Bond Buyer. “We appreciate the changes to the methodology and the resultant upgrade. The upgrade acknowledges some of the city’s economic and financial strengths that were not recognized under the prior criteria.” 

“One of the key changes with the criteria published in April is that we’ve moved to a model-supported rating analysis, [with] a heavier reliance on quantitative factors to the final rating outcome,” Michael Rinaldi, senior director at Fitch Ratings, told The Bond Buyer. 

The new system allows the agency to say with greater specificity, for example, what level of reduction in the city’s long-term liability burden would be required for further positive rating action. (A 20% reduction, which, Rinaldi said, seems out of reach in the near future: “In part because of the pension problem, we think that liability is going to be fairly stagnant at best, into the intermediate future.”)

Fitch praised the city’s sound fiscal practices and dedication to bridging budget gaps through recurring rather than one-time funding. Chicago has also weaned itself off scoop-and-toss restructurings of its GO debt, a practice that “exacerbated” its debt burden in the past, according to Ashlee Gabrysch, Fitch’s regional manager of Midwest tax-supported ratings.

The city also reformed its pension contribution practices. Fitch said it “expects continued pressure” on the city’s debt and pension affordability and “only modest” progress on pension funding. But the city has begun making supplemental contributions above the 90% level required by statute.

“It’s hard to talk about Chicago without [talking about] pensions,” Rinaldi said. “The city has made important progress. … While the efforts to fund above the statutory level are positive, they’re fairly recent. I think it’s important that the new administration carried forward with the prior administration’s introduction of this concept and payment. But they still would not close the gap between the current funding level and that actuarial level for, I think they are estimating somewhere around 2030. So they’ve got a ways to go.”

Rinaldi added there are other assumptions underpinning the city’s pension plans, such as the open amortization, that make it challenging for the city to lower the pension liability, “absent them being quite consistently fortunate with respect to their investment returns relative to the plan’s assumptions.” 

Gabrysch noted the absence of a dedicated revenue stream for the advance pension funding policy makes it more fragile — such a revenue stream would render the policy “less vulnerable to year-to-year budgetary issues and differences in terms of policy prioritization either within one administration or across administrations.”

“What we’re looking for is that they continue to demonstrate a commitment to making these advance payments,” Rinaldi added. 

Jaworski said the city plans to continue to make the supplemental payments to reduce net pension liabilities.

Chicago contributed $242 million above the statutory requirement in 2023 and $307 million above the requirement in 2024. It expects to contribute another $271 million above the level required in 2025. Through 2030, Chicago has said it will contribute $1.1 billion in advance funding, Fitch said.

Fitch also acknowledged some of Chicago’s strengths.

Rinaldi pointed to the diversity of the city’s economic base, the breadth of industry in the city and how “the sheer size and output help to temper some of the other economic and demographic metrics that we look at, which for Chicago and many other large urban centers, do not measure quite as well.” 

Those weaker metrics include population trend, income levels, its reliance on tourism and its share of service industry jobs.

At the 2024 investors conference, the city’s finance team made the case that Chicago was being rated solely on its pension liability, and that as the city with the third-ranked gross domestic product nationally, the most diversified economy of the major U.S. metro areas, a national transportation hub and the busiest freight rail hub in the U.S., Chicago was not getting its due.

The city also plays host to more than 30 Fortune 500 company headquarters and is ranked among the top 10 U.S. office markets, Jaworski said at that conference. 

“We certainly recognize that Chicago plays an integral role in the operation of not only just the regional economy, but the U.S. and, taking it a step further, I think it’s safe to say, the global economy,” Rinaldi said. 

The city’s upgrade came nearly a week after Fitch upgraded Cook County, of which Chicago is the county seat.

Fitch upgraded the county’s long-term issuer default rating and unlimited tax GOs to AA from AA-minus on July 23, based on the new criteria. The outlook is positive.

Citing the county’s ability to raise taxes, midrange expenditure control and the expectation that unrestricted reserves will stay at or above 10% of general fund spending, Fitch put Cook County at the aaa level of financial resilience.

Still, the county’s population trend lands it in the “weakest” percentile of the Fitch rated portfolio, and its long-term liability composite is “weak,” weighed down by very high carrying costs and liabilities to governmental revenues. Counterbalancing that is a stronger assessment of liabilities to personal income, Fitch said.

If the county maintains the current improving trend of long-term liability burden metrics, there could be further improvement in its ratings, Fitch said.

Fitch rated Cook County’s $168.2 million of sales tax revenue bonds, Series 2024, AA with a positive outlook. The bonds are expected the week of Aug. 5, with Loop Capital Markets as senior manager. Proceeds will be used to refund the county’s Series 2014D and Series 2018 GO bonds and to finance or refinance construction of and repairs to county buildings. KBRA rates the bonds AAA.

As for the county’s largest municipality, the Fitch analysts acknowledged that Chicago is actively investigating new revenue streams, with an aldermanic revenue commission and one that’s being run by the city’s finance team.

“We are well aware of the fact that the city is putting a lot of energy into identifying sustainable new revenue sources to help support its existing and future spending needs,” Rinaldi said. “There’s nothing in our criteria that would indicate that one type of revenue is ‘better’ than another. But what we look at within the overall composition of the entity’s revenues is how sensitive they might be to future economic cycles. 

“Chicago has a really diverse collection of revenues that are fairly sensitive to underlying economic conditions and activity,” he added. “And so you tend to see that in some of their revenue performance.”