Kroll Bond Rating Agency downgraded Chicago's general obligation bonds to A-minus from A on Friday.
KBRA said the move reflects the city's "extremely limited" options for raising new recurring revenues or materially cutting operating expenditures. It said those conditions will likely lead to a continued reliance on one-time budgetary fixes.
The downgrade resolves KBRA's November
The rating agency cited the city's recent reliance on one-time rather than recurring revenue solutions; its advance pension funding policy, a long-term credit positive which nonetheless threatens to crowd out other corporate fund spending in the short term; and the possibility that the system's Tier 2 benefits could run afoul of IRS safe harbor tests, prompting retroactive adjustments and higher future pension benefits.
KBRA noted that the Illinois legislature is considering changes to cost of living adjustments and to the Tier 2 pensionable salary cap, to bring it up to the Social Security wage base, but no legislation has been passed to date.
The rating agency credited Chicago for its role as a Midwest regional economic hub and its tax base, but said offsetting the city's strengths are the size of Chicago's outyear budget gaps and rising pension and debt service costs that are eating away at other spending priorities.
Linda Vanderperre, senior director in KBRA's public finance ratings group, stressed that the city's "extremely high" fixed cost burden is driving a need for new recurring revenues, which proved elusive in the 2025 budget debate.
"It is our view that City Council may once again resist a property tax increase during the FY2026 budget cycle," Vanderperre said. "Unless alternative structural revenues are identified, we believe the city will face many of the same difficulties balancing the FY2026 budget as it did this year."
Without new and ongoing revenue sources, fixed costs will outpace revenues, pushing the city toward a vicious cycle of one-time fixes, KBRA said in its
KBRA also warned the city against using Chicago Skyway and parking meter reserves to offset budgetary shortfalls, borrowing for anything other than capital purposes or failing to heed established financial and debt policies — any of which could trigger another downgrade.
"The city needs to find recurring sources of revenue in order to address its structural budget deficit, and the longer they wait, the harder that gets," said Lisa Washburn, managing director at Municipal Market Analytics. "Waiting to solve a problem ends up costing the issuer more."
Washburn also noted the increasing convergence of Chicago's ratings into a tighter range.
S&P Global Ratings downgraded Chicago earlier this month to BBB from BBB-plus. The outlook is stable.
Fitch Ratings assigns Chicago's GOs an A-minus rating with a stable outlook following a July upgrade. Moody's Ratings rates Chicago Baa3 with a positive outlook; the rating agency said last month that the city's 2025 budget is credit neutral.
"The downgrade expresses [KBRA's] concern about the ability of the city to continue to balance its budget and maintain fiscal health, but it doesn't seem to be suggesting that it's any more difficult than what's already been discussed in the market," Washburn said.
She noted that the mayor's relationship with the Illinois state government is a factor in the city's ability to find new recurring revenue streams.
"It is important for the mayor to establish a strong relationship with the state, given that he needs its help," she said. "And it makes sense to do so, since there is political alignment there. So the relationship should be at least somewhat supportive.
"Facing potential adversity from the new administration [in Washington] should have the power to bring the mayor and the governor more into alignment on the things that they're working toward," she added.
"We are aware of recent points of contention between the city and Springfield relating to policy and funding decisions, but our rating action considers only the absence, to date, of new revenues, without ascribing responsibility for the lack thereof to either or both parties," KBRA's Vanderperre said.
Washburn also stressed that the city has an interest in the financial health of the Chicago Board of Education, and said Chicago leaders should "look for reasonable ways to address the fiscal issues that confront both."
Vanderperre noted that the city's 2025 budget expects Chicago Public Schools will make a disputed $175 million Municipal Employees' Annuity and Benefit Fund pension payment.
"Failure by CPS to make the pension contribution that opens a hole in the City's FY 2025 Budget, while not expected, would be of concern for the city's credit profile," she said. KBRA rates Chicago Board of Education's GO bonds BBB-plus and BBB, depending on whether it considers the bonds secured or unsecured. The outlook is negative.
The city's finance team had no comment as of Friday afternoon.
