S&P Affirms Chicago’s Rating Following Pension Funding Plan, Reports Reuters

Chicago’s Credit Rating Affirmed Amid Pension Crisis Plan

Chicago (Reuters) – Standard & Poor’s Global Ratings has affirmed Chicago’s credit rating, praising Mayor Rahm Emanuel’s new strategy to prevent insolvency in the city’s largest pension fund through a proposed tax on water and sewer usage.

S&P described the plan as "a positive step," maintaining Chicago’s general obligation rating at BBB-plus with a negative outlook. The rating could shift to stable once the tax details are formally established.

In June, S&P had cautioned that without a "solid funding mechanism" for municipal and laborers’ retirement systems, the nation’s third-largest city risked rating downgrades.

Last week, Mayor Emanuel presented a proposal to increase contributions to the municipal fund, which supports approximately 71,000 current and former city employees, through a new water and sewer tax that is set for a vote by the city council next month.

This initiative follows earlier efforts to enhance funding for police and fire pensions via a phased-in property tax increase of $543 million, as well as for the laborers’ fund through a telephone surcharge increase.

The municipal fund, being the largest retirement system in the city, along with the laborers’ fund, the smallest, is predicted to face depletion within the next decade. Emanuel is also required to secure approval from the Illinois Legislature later this year for revised funding schedules for these pension systems.

The mayor’s approach has garnered positive reactions from the U.S. municipal bond market, where city bonds were trading at higher prices last week, though still reflecting significant credit spreads compared to the market’s benchmark yield.

Compounding the challenge of addressing the city’s pension obligations, the Illinois Supreme Court invalidated a 2014 state law in March that aimed to reduce benefits and increase contributions from both the city and its workers for the municipal and laborers’ funds.

Chicago currently faces a staggering $33.8 billion unfunded pension liability, which has been a significant factor in its credit ratings, teetering between low investment grade and "junk" status.