S&P Global Ratings downgraded Chicago's general obligation debt to BBB from BBB-plus Tuesday, saying the city's 2025 budget fails to address a persistent structural imbalance.
The outlook, which S&P
S&P said the 2025 budget negotiations between Mayor Brandon Johnson and the City Council left the city with fewer practical options for new revenue streams, and questioned the willingness of City Hall to cut spending. The lower rating, it said, more accurately reflects the city's credit prospects.
S&P also lowered to A-plus from AA-minus its rating of the Sales Tax Securitization Corp. of Chicago first- and second-lien bonds, noting that the rating on STSC debt is constrained by the city's GO rating. S&P assigned a stable outlook to STSC debt and removed it from CreditWatch.
The city's finance team referred questions to a statement released by the mayor's office, which noted that Chicago's economic output is larger than that of most countries and the region has seen decades of steady economic growth.
"The city's credit fundamentals have not changed, and the rating does not accurately reflect the strength of the city's credit or ability to meet its debt and pension obligations," the statement said.
S&P gave Chicago credit for preserving the supplemental pension payment in the
"The stable outlook reflects our expectation that the city's overall reserves and liquidity will remain strong enough to support the BBB rating through the outlook horizon, that it will continue making its advance pension payments and therefore see relative stability in pension funding levels, and that it will continue to work toward addressing the structural budget gap, likely through some combination of cost-cutting and new revenue over a multiyear period," S&P director Scott Nees said in a news release.
S&P's rating report also pointed to the fiscal cliff looming with the end of COVID-19 relief funds and to the city's still underfunded pensions and high fixed costs for retirement benefits.
"We think it's at least possible that the kind of inaction around making larger structural adjustments that we saw with the 2025 budget process could resurface again in the future," Nees told The Bond Buyer. "At minimum, we believe this context introduces uncertainty around the ability of key city stakeholders to reach consensus around a fiscal path forward, if not reproducing some of the exact same circumstance that contributed to the political infighting that hampered budget development in 2025."
"They're still investment grade," noted Municipal Market Analytics Managing Director Lisa Washburn. But the city's "coming budget cycles are going to be more difficult because of the use of one-time revenue sources, and as they become more difficult, looking for recurring revenue sources is going to become even more important."
Right now, economic times are relatively good, Washburn said, but with economic softening or recession would come other challenges. And Chicago's reliance on economically sensitive revenue sources is a vulnerability.
Washburn also pointed to one-time maneuvers like obtaining savings by arbitraging between the city's GO ratings and Sales Tax Securitization Corporation ratings, using better-rated debt to take out GO debt.
"The more reliance on one-time measures, the more you need to actually solve for later," she said.
"We in the industry have learned countless times that waiting to address issues tends to result in more difficult problems," Washburn said.
"S&P is absolutely right," said Civic Federation of Chicago President Joe Ferguson. "S&P gave ample warning of its concerns and the things it would be watching earlier in the year [last year], and those things simply weren't responded to."
Instead of leaning into the longer-term project of structural balance, City Hall "took a transactional approach" and had "an extractive versus generative mindset about how to balance a budget," Ferguson said. It was about, "Where can we get the money?" he said, versus addressing how to make the most use of technological innovation or identifying the highest and best use of public sector workers.
"Anyone who raises the efficiency and waste question is characterized as just looking to fire people — that is not the case," Ferguson said. He pointed as an example to the opportunity during the 2025 budget process to write into the management ordinance legally obligated management groups and studies in search of efficiencies: an examination of overtime, a citywide workforce allocation study, meaningful legislative hearings and so on.
"Simply to step into the exercise would send an outsize signal to everybody that Chicago finally gets it," he said. In the absence of such a signal, "Why should the agencies believe that next time is going to be different?"
Ferguson also pointed to the
"It really should be understood that what S&P did yesterday was to say to Chicago, we meant it when we said it with respect to our outlook," he said. "And that should be a flashing red light for CPS, because S&P has said something very similar with respect to CPS."
Nees noted several areas of overlap between the credit performance of CPS and the city. Chicago's ability to attract and retain residents hinges in part on the school district's ability to fulfill its mission, he said, and CPS provides social services to disinvested parts of Chicago. Further, CPS non-teaching staffers' Municipal Employees' Annuity and Benefit Fund is the city's largest pension fund, so CPS decisions on hiring and pay directly impact Chicago's pension burden.
"And as we saw with the fiscal 2025 budget gap, CPS's ability to reimburse the city for its contributions to MEABF directly affected the size of the structural budget gap, increasing the gap by $175 million when CPS did not include the reimbursement in its 2025 budget," he said. "We think this financial dependency has grown in significance since CPS began making these payments under the Lightfoot administration."
The city's response has been to point out that its fiscal situation wasn't made worse by the 2025 budget, Ferguson said. But "right now I think the general perspective is, if we're only holding ground, we're losing ground."
At the end of the day, the state government will need to be part of the solution for CPS and for the city, he added. And Gov. JB Pritzker and leaders in Springfield have so far been "pragmatically appropriate" in looking for signs of fiscal responsibility and guardrails about how money is going to be spent.
"The get requires a give, and the state is right to view it that way," he said.
Kroll Bond Rating Agency placed its A rating of Chicago on
