Moody's says Chicago's 2025 budget doesn't change credit trajectory

Bloomberg News

The 2025 budget Chicago's City Council passed this month will not materially alter the city's credit profile, Moody's Ratings said in a Monday statement.

The final 2025 budget featured no property tax hike, and received criticism for using one-time measures, but preserved the advance pension payment policy that has earned the city praise for trying to come to grips with its retirement obligations for city employees. 

Moody's rates Chicago Baa3 with a positive outlook.

"The fiscal 2025 budget favorably continues the city's substantially improved pension funding practices," said Moody's Vice President David Levett. "The city's increase in pension funding levels has been a key driver of its improving credit profile."

Levett told The Bond Buyer that one factor driving the city's initial budget gap was the absence of a payment from Chicago Public Schools tied to the Municipal Employees Annuity and Benefit Fund of Chicago (MEABF). The city had covered such payments for years until Mayor Brandon Johnson's predecessor, former Mayor Lori Lightfoot, asked CPS to make the payment. Who would pay it this year has become contested.  

The final budget did include the $175 million payment from CPS, he said, which helped close the budget gap.

The release from Moody's is good news for Chicago, which had been placed on watch negative by S&P Global Ratings and on watch for downgrade by Kroll Bond Rating Agency last month.

S&P rates the city BBB-plus. KBRA rates it A. Fitch Ratings assigns Chicago an A-minus rating with a stable outlook, after upgrading the city in July.

Moody's Levett noted that while the city has broad legal flexibility to raise revenue, its de facto revenue increases in recent years "have not been sufficient to prevent the city from facing perennial budgetary challenges as reflected in an especially difficult fiscal 2025 budget process.

"The city is likely to face another difficult budget process next year given the use of some one-time budget maneuvers, growing expenses and high fixed costs," he added. "While the city has strong legal flexibility to raise revenue… the practical ability to keep boosting resources may be dwindling. Officials are no longer willing to continue increasing the property tax levy, even to keep pace with inflation."

With significant cuts unlikely due to the mayor's pledge of no layoffs, the need to preserve public safety services and high fixed costs, Moody's said the city must secure new revenue sources, most of which would require action from the state government.

But any new revenue streams passed by the legislature — such as an expansion of the sales tax to services — would meet with high demand from multiple units of local government in Chicago. The services tax has already been discussed as a solution to Chicago-area transit agencies' budget woes, for example. 

"The legislature would determine the details of how the sales tax would be extended to services," Levett said. "The rates could stay the same for each local government and simply be extended to services, or the rates could be changed. Multiple governments currently receive a share of the sales tax rate imposed within the city."

The situation at Chicago Public Schools is also a concern, with Chicago Civic Federation President Joe Ferguson recently warning, "If CPS goes under, it's going to have a significant gravitational pull on how the rating agencies are looking at the city."

The Board of Education, which is controlled by Johnson's allies and appointees, Friday fired the district's CEO, who had resisted having the mostly junk-rated school district take on a loan to fund raises and benefits for staff.

Levett noted, "The most significant financial link between Chicago and Chicago Public Schools is that some district employees participate in the MEABF."

Still, Moody's stressed that the city's home rule status is a key credit strength and provides substantial flexibility.

And Levett noted, "The city has a solid financial position, with a general fund balance that remains well above pre-pandemic levels, providing the city with some cushion as it seeks to resolve its ongoing budgetary challenges."

Moody's over time has typically taken the most critical view among the rating agencies of Chicago's unfunded pension obligations, ultimately downgrading the city to junk in 2015.

It returned Chicago to investment grade in 2022, after the city adopted a 2023 budget that began making additional pension funding appropriations. Moody's lifted its rating outlook to positive in January, citing the stronger pension contribution practices and upward movement in the city's financial position.