Moody’s revises Chicago’s outlook to stable

Moody’s Ratings revised Chicago’s outlook to stable from positive and affirmed the city’s Baa3 issuer and general obligation unlimited tax ratings.

Moody’s also revised the outlooks on the city’s sewer enterprise and water enterprise debt to stable from positive. It affirmed the Baa1 ratings on the water revenue bonds and the senior lien sewer revenue bonds, as well as the Baa2 rating on the junior lien sewer revenue bonds.

The rating agency on Friday pointed not only to the city’s 2026 budget deficit — which Mayor Brandon Johnson last week projected at $1.15 billion — but to the state’s passage of a law that saddles Chicago with higher pension obligations starting in 2027 and to the Chicago Board of Education’s Thursday passage of a 2026 budget without making a disputed pension payment, which will now likely fall on the city. 

Moody’s also said in the Friday press release the city’s fiscal 2024 deficit dragged reserves back to pre-pandemic levels, “with an available fund balance ratio, adjusted for other fund considerations, dipping to less than 10% revenue in fiscal 2024.”

For now, the Baa3 rating “balances the city’s considerable strengths including a massive economic base against a long-term liabilities ratio that exceeds 500% of revenue; the highest of peer cities,” Moody’s said.

City Council members were expecting something like this from rating agencies, Ward 32 Alderman Scott Waguespack told The Bond Buyer.

“[T]he CPS payment — and what’s been happening not just with the governor but with the General Assembly, putting unfunded mandates on us on a constant basis — has contributed” to Chicago’s current situation, he said.

“In a broader sense … we’re kind of expecting [a downgrade] to come next,” he added.

When it announced the outlook revision, Moody’s warned Chicago that any abandonment of the city’s advance pension payments, return to scoop-and-toss debt practices, borrowing for operations or decline in the adjusted available operating fund balance could trigger a downgrade.

“We’ve had people who are the mayor’s allies who have said we should just refinance,” Waguespack said. “The bigger problem with that [kind of talk] is it just creates instability and a lack of predictability for how developers and investors look at the city.” 

Waguespack noted some of the mayor’s allies on City Council pushed to abandon the pension funding policy rating agencies praised during last year’s budget debate. He credited former Mayor Lori Lightfoot and former CFO Jennie Huang Bennett with putting the city on a better financial path — through the advance pension funding policy, beginning in fiscal 2023, and by building up the city’s reserves. 

“It really made sense to me when they first brought it up,” he said of the advance pension funding policy. “That will help our ratings not just now, but it creates that predictability and stability.

“And that’s what really worried a lot of us over the last few years,” he added. “That we’re going to consider not making the payment, we’re going to tap into the reserves, we’re going to kick the can down the road and do some scoop-and-toss. This basically could reverse the course” the city had been on, which resulted in multiple credit upgrades.

The Johnson administration has yet to advance a plan to cover the disputed pension payment costs, according to Waguespack.

“We actually had a briefing on Friday afternoon and the budget team had no answer for how to deal with that yet,” he said. 

He noted alderpeople were supposed to get a report from the mayor’s budget task force, but it’s not ready yet.

Waguespack also raised concerns about the $3.5 million Ernst & Young report the city commissioned to address its budget gap.

The Johnson administration told alderpeople on Friday it will not be releasing the report, but will share excerpts that it likes, Waguespack said.

“They weren’t talking about efficiencies or cuts; they’re looking for new fines and fees,” he said of the Johnson administration, raising the question of whether any recommendations from Ernst & Young about cuts would ever see the light of day. 

Some City Council members are planning a resolution calling for the report’s release, Waguespack said. 

The upcoming budget hearings should yield more information about how the Johnson administration plans to add revenue to balance the budget. 

The hearings run Tuesday through Thursday during the weeks of Sept. 9 and Sept. 16, with the Office of Management and Budget and the Office of the CFO presenting Sept. 9. (The mayor’s executive budget is due out in mid-October, and the budget vote is scheduled for November.)

But the big-ticket items on the administration’s list to raise revenue require the state to make changes through the General Assembly, Waguespack said.

“The city keeps saying we’re going to go to Springfield” for additional funding, he said, adding that the Johnson administration has sometimes shown up there too late to achieve its goals.

“When you look at the General Assembly, they said they were going to take over the transit funding issue, and they failed,” he said. “It makes you kind of wonder why there’s a lack of leadership, frankly, on the fifth floor, but also in the General Assembly.”

The city’s finance team declined to comment. Moody’s did not respond to questions by press time.