Moody's Investors Service raised Chicago to investment grade Tuesday, one day after the City Council passed Mayor Lori Lightfoot's 2023 budget that sends extra funding to the city's pension system.
Moody's raised the city's issuer and general obligation bond rating to Baa3 from Ba1, removing the junk label that has tarnished the city's GOs since May 2015 after an Illinois Supreme Court ruling tossing out state pension cuts signaled that the city's pension overhaul likely faced the same fate.
"The upgrade of the issuer rating to Baa3 reflects the city's substantial increase in pension contributions, including an upcoming boost to comply with the city's new pension funding policy that targets contributing an amount sufficient to keep reported net pension liabilities from growing," Moody's said.
The budget provides an additional $242 million above a statutory contribution and launches a new policy aimed at staving off the need to sell assets to meet retiree obligation. The city is currently making actuarially based contributions but funded ratios remain weak so the funds are vulnerable to investment losses.
In language that is sure to provide fodder for Lightfoot's 2023 re-election campaign, Moody's said: "Governance is a driver of the rating action because the city has improved budgetary management through a willingness and ability to increase revenue that reduced a structural deficit and facilitated the elimination of debt-based budget maneuvers and pension cost deferrals."
The new rating remains at the lowest investment grade, with a stable outlook. "Leverage and fixed costs will remain very high for many years," Moody's said.
Chicago's City Council signed off on a $16.4 billion 2023 budget package and $1.85 billion of general obligation borrowing against a backdrop of debate over the city's fiscal progress and efforts to combat crime and climate change.
The council's budget passage Monday came after several hours of debate with the budget winning approval in a 32 to 18 vote, followed by a 29-21 vote on the property tax levy and 40-10 vote on the GO borrowing along with other borrowing measures including a federal Water Infrastructure Finance and Innovation Act loan and interim financing mechanisms for O'Hare and Midway airports.
"Over the past three years, we have steered our city through some challenging fiscal storms," Lightfoot said. "Hard work pays off. With the passage of this budget, we have continued to take undeniable steps toward securing our government's financial future. The rating agencies and our bondholders have taken notice and are rewarding our hard work."
Lightfoot Monday, before the Moody's upgrade, called upgrades
The Fitch action in October
Fitch raised $1.5 billion of second lien sewer bonds and $1.8 billion second lien water revenue bonds to A from A-minus; it links the issuer and general obligation rating to water and sewer ratings due to the city's oversight of the system.
With a healthy fund balance,
Fitch also put a positive outlook on the GO and, in turn, the water and wastewater bonds. The administration hoped for further positive rating momentum, but the Moody's upgrade is most coveted as it makes the city investment-grade across the board. S&P has the city at BBB-plus and Kroll Bond Rating Agency at A.
The positive Fitch outlook "indicates that there's a high likelihood that we'll be upgraded again in the next one- to two-year timeframe, assuming that we persist on the financial path that we've laid for ourselves," Chief Financial Officer Jennie Huang Bennett said in a statement.
The city will sell $757 million of new money GOs later this month or early next month and has new money and refunding water and sewer bond deals planned for early next year.
The Civic Federation of Chicago
"This budget is good news for taxpayers," federation President Laurence Msall said. "There are no general tax increases and the city's financial improvement as recognized by a recent Fitch Ratings upgrade should save taxpayers money on future borrowing.
"There is a lot of work that needs to be done to better communicate the city's strategy for improving policing and reducing violent crime," Msall said. "We have concerns that the federal Consent Decree is not being used effectively as a tool to improve constitutional policing. And while it appears the mayor is making progress, the lack of transparency around police staffing levels and resource allocation must be addressed."
The
Chicago headed into budget season with just a $128 million gap to close — the lowest in recent memory — but that was with the expectation of a roughly $80 million hike in property taxes based on an annual trigger put in place last year that allows for annual increases up to 5% based on inflation.
With citywide elections looming in February, Lightfoot scrapped the entire hike, which would have made budget passage a tougher task.
Even without a tax hike, the budget came under attack from multiple fronts including from some members who Lightfoot has tapped to lead committees and were once considered her allies.
Progressives were disappointed in the administration's refusal to re-establish an environmental department, saying Lightfoot's plan to create an office of climate and environmental equity falls short of what's needed. Many speeches ahead of the vote focused on the need to do more to combat crime and bolster a police force stung by retirements.
Alderperson Tom Tunney, who is retiring and considering a bid against Lightfoot in the 2023 contest, took the administration to task for the additional borrowing authority without providing sufficient detail on existing project spending to ensure accountability. "I really feel like we need to do the first set of bonding before" another round that doubles the authority is approved, Tunney said.
Tunney also hit on the crime concerns. "My residents don't feel safe," he said.
Alderperson Brendan Reilly called the mayor's recent comments that a vote against the budget represented a vote against the police as "intellectually dishonest" and attacked funding for the Chicago Transit Authority that's been plagued by crime, service and cleanliness complaints. "We're investing more Chicago tax dollars in a failing transit system that is not only unreliable, but is unsafe."
Others offered a more positive assessment.
"This budget is a sound and solvent budget for the future of our city," said Alderperson Scott Waguespack, chairman of the council's Finance Committee. "We are improving the fiscal footing of the city" and the Fitch upgrade "says a lot about the plan" undertaken over the last three years.
"In any process, no one gets everything that's being asked for" but the budget does move the city "in the right direction," said Alderperson Jason Ervin, who voted for the budget.
The upcoming GOs will finance capital projects in the city's $3.7 billion, five-year Chicago Works capital program and the $1.2 billion Chicago Recovery Plan that also relies on COVID-19 American Rescue Plan Act relief grants to fund a broad range of social programs.
The deal will also include the city's first environmental, social, and governance-labeled bond series and will be structured to prioritize local orders.
The
The new $1.85 billion of GO authority covers capital spending planned through 2024. The other debt measures approved Monday include a $336 million federal WIFIA loan to replace lead-lined water service lines, an extension of $250 million of existing commercial paper authority and new authorization for a line of credit at Midway International Airport and a $50 million line of credit for unforeseen capital expenses at O'Hare International Airport's rental car facility.
The city previously named teams for a series of GO deals expected over several years and will add the new borrowing capacity to the par amount of those deals.
The teams for the new money tranches previously approved include RBC Capital Markets, Cabrera Capital Markets, and UBS as senior managers on the upcoming sale; Barclays and Loop Capital Markets on the second sale; and BofA Securities and Cabrera on the third.
The city's sweeping lead-pipe replacement needs that carry a projected $8.5 billion price tag. The federal government has already approved the WIFIA loan.
Moody's raised water and sewer revenue bonds linked to the city's rating, with senior lien bonds moving up one notch to Baa1 and the junior lien raised to Baa2. The city has $3.6 billion of GO bonds, $2.3 billion in water revenue bonds and $2 billion of sewer debt.
