Pension funding hikes bring Chicago a stable rating outlook from Fitch

08/30/2016 15:54

CHICAGO, Aug 30 (Reuters) - Chicago's action to increase funding to its employee pension funds helped the city keep an investment-grade credit rating and gain a stable outlook from Fitch Ratings on Tuesday.

Fitch had dropped Chicago's general obligation rating to BBB-minus, one step above the junk level, from BBB-plus in March, assigning a negative outlook to the lower rating. The downgrade came in the wake of an Illinois Supreme Court ruling striking down a state law that would have boosted funding for two of the city's four pension funds, which were headed toward insolvency.

The credit rating agency on Tuesday affirmed the BBB-minus rating on the city's $9.2 billion of outstanding GO bonds and cited a "material increase" in pension funding, along with an improved financial profile for the outlook change to stable from negative.

Credit ratings for the nation's third-largest city have tumbled into the low investment grade to junk levels due largely to an unfunded pension liability that stood at $33.8 billion at the end of fiscal 2015. Chicago has taken steps to address the problem with a phased-in $543 million property tax increase for police and fire pensions, a telephone surcharge increase for its laborers' fund, and a proposed water and sewer tax to boost funding for its largest fund, covering municipal workers.

"The stable outlook incorporates Fitch's expectation that the city will continue to make progress toward structural balance," Fitch said, referring to the city's chronic budget deficit. The city estimated that gap at $137.6 million in fiscal 2017, which begins Jan. 1, down from a high of $654.7 million in fiscal 2011.

Mayor Rahm Emanuel called Fitch's move "proof positive that Chicago's finances are moving in the right direction."

"We are not going to solve the pension funding challenges overnight, but we have made substantial progress to finally put all four pension plans on a path to solvency, and we are seeing favorable responses from ratings agencies," the mayor said in a statement.

Negative outlooks remain on Chicago's Ba1 junk rating from Moody's Investors Service and BBB-plus rating from Standard & Poor's.

Chicago plans to sell about $1.25 billion of GO bonds later this year. (Reporting by Karen Pierog; Editing by Matthew Lewis)

08/30/2016 15:54