Moody's Investors Service has lowered Chicago's credit rating to junk bond status, a move Mayor Rahm Emanuel is calling irresponsible.
Now, the slow-burning flames of this downgrade crisis at City Hall are suddenly roaring.
The decision by Moody's means the cost of borrowing by Chicago will increase.
Moody's didn't just slash and burn the City of Chicago's general obligation credit rating to junk status, it also downgraded to junk nearly another $4 billion in bonds tied to revenue from the city's water and sewer systems.
Moody's didn't touch the State of Illinois' credit rating, but blamed its sweeping downgrades of city debt on a case the state lost last week at the Illinois Supreme Court. The court ruled a law unconstitutional on Friday that would have cut public employee pensions, which prompted Moody's to declare the following:
"We believe the city's options for (reducing)...its own unfunded pension liabilities have narrowed considerably."
Moody's suggested if the city raised taxes, it might re-evaluate the credit rating downgrades.
That drew an angry, written response from Mayor Emanuel.
"While Chicago's financial crisis is very real and at our doorsteps, today's...decision by Moody's...is not only premature, but it is irresponsible to play politics with Chicago's financial future by pushing the City to increase taxes on residents without reform," Emanuel wrote.
Emanuel said he would continue to "work in Springfield and with our partners in labor to ensure we will always meet our obligations, protect the retirements of our workforce, continue to deliver vital city services, while protecting our taxpayers."
So, does this mean the international credit markets will now lump Chicago together with Detroit, that other credit-challenged Midwestern metropolis?
“I've been in Detroit. And, for many reasons, Chicago is a much different economic situation than the Detroit economic situation is; the diversity of the city's economy. The size of the economy is just -- We're in a much different place than the City of Detroit's been over the last couple of decades,” said Chuck Burbridge, Executive Director of the Chicago Teachers Pension Fund.
Now, the mayor and other Chicago Democrats are suddenly much weaker politically.
That $2.2 billion is the key. If the big banks demand the cash Moody's has now enabled them to demand, the city probably can't pay. It drastically increases pressure to cut a deal with Gov. Bruce Rauner that they otherwise might not have considered. Rauner's bargaining position just got a lot stronger.
In their announcement, Moody's noted the costs of servicing its unfunded liabilities will place "significant strain on the city's financial operations absent commensurate growth in revenue and/or reductions in other expenditures."
Emanuel said Moody's is out of step with other rating agencies and ignores the city's progress in dealing with its financial liabilities.
Statement from Mayor Rahm Emanuel
“While Chicago's financial crisis is very real and at our doorsteps, today's irresponsible decision by Moody's to downgrade the City's credit by two steps goes far beyond that reality. Their decision was driven solely by the overturning of a state pension bill that did not include Chicago's pension reform, yet they did not downgrade the State of Illinois. Moody's is out of step with other rating agencies – by as many as six steps – as they refuse to acknowledge Chicago's growing economy, progress we have made on our legacy financial liabilities, balancing four budgets without raising property taxes while adding to our reserves, securing pension reforms for two of the City's four funds to preserve and protect retirements for 61,000 employees that were previously in danger, and the progress we are now making with our partners in labor at the other two city funds. This action by Moody's is not only premature, but it is irresponsible to play politics with Chicago's financial future by pushing the City to increase taxes on residents without reform. I am committed to focus on both reform and revenue to address Chicago's fiscal crisis, and we will continue our work in Springfield and with our partners in labor to ensure we will always meet our obligations, protect the retirements of our workforce, continue to deliver vital city services, while protecting our taxpayers.”