Moody’s downgrade: Chicago’s path toward junk

In what’s likely to be a chain of credit downgrades for some of Chicago’s sister governments, Moody’s Investors Services cut the city of Chicago’s credit rating to Baa1 from A3. That downgrade follows the rare triple-notch downgrade the city received last year from Moody’s as a result of the city’s growing and out-of-control pension debt. Excluding Detroit,...

In what’s likely to be a chain of credit downgrades for some of Chicago’s sister governments, Moody’s Investors Services cut the city of Chicago’s credit rating to Baa1 from A3.

That downgrade follows the rare triple-notch downgrade the city received last year from Moody’s as a result of the city’s growing and out-of-control pension debt.

Excluding Detroit, Chicago now has the lowest credit rating of the major U.S. cities.

Foreshadowing even more bad news, Moody’s kept a negative outlook on the city’s credit rating. That means the next move is more likely to be a downgrade.

Chicago is now only three notches away from junk bond status.

Moody’s action should not come as a surprise. The rating agency has been diligent in measuring the impact of rising pension debt on a government’s ability to repay its debt. Just recently the agency reported Illinois’ state pension debt at $187 billion, nearly double the state’s official estimate of $97 billion. Moody’s takes a more conservative and prudent approach than the state in its actuarial assumptions.

Unfortunately, the city of Chicago’s pension debt is just one part of the crisis facing Chicago taxpayers. The Chicago Public Schools’ operating shortfall and its pension debt are just as disconcerting. Add to that debt of the Chicago Transit Authority, the Chicago Park District and the share of Cook County debt that Chicago taxpayers are on the hook for, and the numbers are alarming.

A recent Institute report put the debt of Chicago taxpayers at more than $61,000 per household. And when Moody’s more conservative approach to pensions is included, that number jumps to $84,000 per household.

Chicago and its sister government will never be able repay the amount of debt and pension obligations currently on their books. Never. And they can’t tax their way out of this problem because people will just flee. People have already been going to the collar counties and Lake County, Ind., for years.

Chicago’s population has now fallen below its 1920 levels.

There is only one way out for Chicago and that’s through real pension reforms that massively reduce the city’s unfunded liability and end the accrual of more pension debt in the future.

But until state and city leaders let go of the status quo, you can expect more downgrades in the near future. The sister governments are next.