Fitch Ratings cut the outlook to negative from stable Wednesday on Chicago's BBB-minus general obligation bond rating.
The action increases the risk that the city will be saddled with a second speculative-grade bond rating. Moody's Investors Service cut the city to junk five years ago.
The new negative outlook also applies to the AA-minus rating Fitch assigns to both the senior and second liens of the city’s Sales Tax Securitization Corporation’s AA-minus rating assigned to both the senior and second liens.
The city plans to sell bonds under both credits as part of its plans to manage a $2 billion budget gap it faces in the wake of the coronavirus pandemic.
S&P Global Ratings rates Chicago BBB-plus with a negative outlook that was assigned in April citing pandemic fiscal strains. Kroll Bond Rating Agency has the city at A and stable.
“The negative outlook reflects credit pressure associated with significant budget gaps totaling $798 million in fiscal 2020 and $1.2 billion in fiscal 2021 against a corporate fund budget of roughly $4 billion,” Fitch said.
Fitch's rating affirmation and outlook change is the first rating action following Mayor Lori Lightfoot’s release of her 2021 budget proposal last week, which would close the budget gaps through a combination of debt refunding and scoop-and-toss restructuring with $450 million of budget relief in 2020 and $501 million in 2021.
“Fitch believes that the city's fiscal plan entails some degree of execution risk, and is sensitive to the unpredictable nature of the current economic and revenue environment. The effectiveness of recurring budget measures is critical to the rating outlook and the city's prospects for returning to structural balance in the post-pandemic period,” Fitch said.
“The restructuring inherently increases the sensitivity of the rating to the timing and strength of revenue recovery in the post-pandemic period. The debt restructuring adds significant costs over time, but Fitch believes their implication for the city's near-term fiscal recovery are more neutral,” Fitch added.
The city sought to highlight the rating affirmation as supportive of the budget proposal. "Fitch has affirmed what we know," finance department spokeswoman Kristen Cabanban said in a statement. "The city's 2021 budget strikes the right balance in addressing the significant financial challenges created by COVID. Their affirmation of the rating indicates that the credit worthiness of the city has been maintained in the budget proposal.
The plan also raises the property tax by $94 million, relies on some other revenue increases and cuts personnel. The plan doesn’t rely on future federal aid, draws a modest $30 million from $900 of various reserves, and funds the city’s rising pension contributions.
The 2021 fixes are 47% structural in nature with non-recurring measures covering the rest of a gap that’s divided between an $800 million pandemic tax hit and $400 million in anticipated structural costs.
The STSC bonds benefit from a bankruptcy-remote, statutorily defined structure that involves a true sale of pledged sales tax revenues but the rating is capped at a maximum six notches above the GO.
Fitch laid out potential rating triggers including the lack of a comprehensive and plausible path to unwind non-structural fiscal measures that avoid a material erosion of reserves, exacerbation of already stressed long-term liabilities and prolonged and deep revenue declines.
For the STSC bonds, a downgrade could result from a GO hit or severe declines in pledged revenues. The city is forecasting a nearly 12% decline in pledged revenues in fiscal 2020 followed by growth of 9% in fiscal 2021 and 8% in fiscal 2022.
Some city council members have criticized Lightfoot's plan, saying the city should dig further into reserves to avoid a property tax hike.
Lightfoot’s finance team on Monday told aldermen the city needs to preserve reserves and continue moving toward structural balance to shield against downgrades that could drive up borrowing costs.
“We have to be continuing to walk that path toward structural balance,” Chief Financial Officer Jennie Huang Bennett told aldermen, adding that she wasn’t sure the city’s ratings would survive intact through the budget season.
