S&P’s lift returns Chicago’s rating outlook to stable across the board


Chicago now has stable rating outlooks across the board after S&P Global Ratings lifted its outlook from negative Thursday.

The rating agency cited $1.9 billion in federal relief, a recovering economy and budget decisions that haven’t dented the city’s path toward structural balance in 2023.

S&P’s affirmation of Chicago’s BBB-plus general obligation rating comes ahead of a more than $1 billion refinancing under the GO and Sales Tax Securitization Corp. credits and a tender offer/exchange planned before the end of the year.

Chicago has now recovered all four stable rating outlooks it lost in the immediate wake of the COVID-19 pandemic.

Bloomberg News

The refunding kicks off about $8 billion of city borrowing planned through 2023 under the GO and STSC credits and airport and water/wastewater enterprise systems.

All four rating agencies had moved the city’s outlook to negative last year as analysts worried about how the COVID-19 pandemic would hit the city’s balance sheet. With S&P’s action, all four have returned the city to a stable outlook over the last few months.

“The outlook revision reflects our view of the city’s return to greater stability following the pressures created by the COVID-19 pandemic,” said Jane Ridley, S&P’s lead analyst on Chicago.

“The recent acknowledgements by outside financial stakeholders confirm what we have been trying to achieve with our 2022 budget, that the city has struck the right balance of financial responsibility and investing in Chicago,” Budget Director Susie Park said in a statement.

S& waited to review the final version of the 2022 budget adopted last week by the city council in order to glean its impact on the city’s 2023 goal of achieving structural budget balance.

Mayor Lori Lightfoot’s administration pushed back the target by one year as the city navigated the pandemic’s toll but S&P had warned further delays beyond 2023 could drive a downgrade.

“We were waiting to see what the budget looked like and how the federal money was being spent,” Ridley said in an interview. “It’s a year later that we initially anticipated” to achieve structural balance but “there’s a clear movement in that direction. They’ve gotten through the pandemic without creating additional long-term pressures.”

The city drew praise for shedding scoop-and-toss debt plans to manage the pandemic’s tax wounds before federal aid was known, for holding steady on moving toward an actuarially based pension contribution in 2022, and for the amortization of GO debt that’s taken hold with the end of scoop-and-toss that were used to defer having to make principal payments.

The city will take the bulk of about $250 million in savings upfront from the upcoming refinancing with most going to help cover a retroactive police raise.

That’s generally not viewed positively as it adds to structural gaps but Ridley said the use of the savings for a one-time expense offsets some concern and “it’s not unexpected given the city’s current situation and fact that we were not expecting structural balance in 2022.”

Whether the city will end up burdening future budgets with programs funded under a $1.2 billion Chicago Recovery Plan once the federal dollars are exhausted remains a longer-term worry but S&P said the Lightfoot administration appears “very cognizant” of the need to use the dollars for one-time investments.

Pension demands weigh heavily as funded ratios remain weak for several decades under the actuarially based formula and improved ratios are needed to win an upgrade, S&P said.

Other pressures weigh on the city.

“Governance structure risks are also evident in Chicago’s relationship with Springfield, the state capitol” due to legislative mandates that weigh on the city like the 2021 passage of enhanced benefits for firefighters, S&P said.

Violent crime and access inequities to health care, public education and housing could contribute to drive demographic declines and pressure economic performance, which the city is banking on to grow revenues.

“The extent to which the plan translates to lasting, long-term change remains to be seen, but we believe this initial installment is meaningful,” S&P said of the city’s recovery package.

The S&P report also assessed climate issues noting that rising water levels in Lake Michigan have prompted remediation efforts and could create larger and relatively sudden changes in lake levels to the detriment of lakefront communities. Ridley said the rating agency has long assessed such social and climate-related issues but is now given them greater emphasis in some rating reports.

The use of one-shots in 2023, pension funding cuts, an economic setback, and political resistance to raise revenues or cut expenses could drive rating deterioration.

Moody’s Investors Service revised its outlook in July. It remains the lone agency that holds the city’s GOs below investment grade at Ba1. Kroll Bond Rating Agency rates the city A and affirmed it this week. Kroll returned the outlook to stable in August. Fitch Ratings which rates Chicago BBB-minus followed in October.

Rating agency commentary has given Chicago Chief Financial Officer Jennie Huang Bennett support when pushing back against council members who wanted to spend reserves, roll back an annual inflation-based property tax levy hike, or reverse the cancellation of scoop-and-toss plans.

During a City Club of Chicago address Tuesday, Bennett sought to make the case that Chicago’s economic and budget health are now on a stable path forward with the help of ARPA-funded investments and $1.2 billion in structural budget changes since Lightfoot took office in 2019.

Former Mayor Richard M. Daley’s pension commission warned in 2010 of looming insolvency in 2022. The former administration of Rahm Emanuel won state approval for the new formula that ramped up to an actuarially based annual funding level that puts the funds on a path to 90% funding by 2055 although improvements are a long way off.

“Instead of insolvency in fiscal year 2022, it’s my pleasure to tell you that with the 2022 budget the city has climbed that $1 billion pension ramp,” Bennett said. “Clearly the work is not done on pensions but it is important for us to acknowledge important milestones like these when they occur so that people recognize the importance of continuing the hard work of walking the hard path toward stability.”

The city also climbed its general obligation debt ramp and is now paying down principal after years of restructuring begun by Daley and continued by Emanuel for most of his two terms in office.

“The city’s historical reliance on scoop-and-toss debt restructuring has built a mountain of debt service and increased future debt burden. The city now has climbed that mountain and is carrying the full freight of annual debt service and within its budget and is in its third year of not resorting to scoop-and-toss debt restructuring to address our budget gaps” with $300 million being amortized, Bennett said.

“Whether its pensions, debt, or structural balance — all of these financial metrics are pointing up for the city’s overall financial status,” Bennett said. “We know the job is not done and there is still more road to walk to achieve full structural balance but it’s clear the city has made enormous strides in achieving that balance.”

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