CHICAGO — With re-election behind him, Chicago Mayor Rahm Emanuel needs to make quick headway on solving the city's severe pension and budget woes to avoid a rating downgrade, Standard & Poor's warned Thursday.
"In order to maintain its current rating, we expect the administration to address the pension and budget challenges head on by providing solutions that will support the city's credit strengths in the near and far term," said Standard & Poor's analyst Helen Samuelson.
Standard & Poor's rates Chicago GO bonds A-plus, with a negative outlook. It's the highest rating from any of the four agencies that cover Chicago.
Despite slicing the structural budget gap in half over the last four years, the city still must tackle an up to $400 million shortfall in 2016 and has yet to come up with a viable plan on how to cover a $550 million spike in its police and firefighter pension fund contributions due next year under a prior state mandate.
"In our view, if the city fails to articulate and implement a plan by the end of 2015 to sustainably fund its pension contributions, or if it substantially draws down its reserves to fund the contributions, we will likely lower the rating," the rating agency said. "This is regardless of whatever relief the state legislature may or may not provide."
The A-plus rating relies on the city's ability to address its budget gap and pension problem with solutions that also ensure long-term stability Chicago and any fix must demonstrate the city's willingness to make difficult choices, the report said.
Those tough choices are likely tied to the city's property tax levy.
"During the course of the election — and particularly during the runoff — Mayor Emanuel avoided addressing the possibility of property tax increases to help pay for these pension obligations," Standard & Poor's wrote.
The city could win an affirmation of its rating and a shift in its outlook to stable if it succeeds in absorbing its higher pension costs while maintaining balanced budgetary performance and reserves at or near their current level, Standard & Poor's wrote.
"If the city doesn't find structural solutions, a downgrade of more than one notch is possible," Samuelson warned.
Moody's rates Chicago's $8.3 billion of GOs Baa2 following a February downgrade. Fitch Ratings and Kroll Bond Rating Agency assign Chicago A-minus ratings. Every agency has a negative outlook except for Kroll's stable.
