Business Headlines

Chicago Outlook Lifted to Stable by Fitch on Pension Improvement

published Aug 30th 2016, 1:19 pm, by Elizabeth Campbell

(Bloomberg) —
Chicago had its credit outlook raised by Fitch Ratings to stable because of the city’s work to shore up its retirement system and avert insolvency for the pensions that don’t have enough money to pay the benefits promised.

“The outlook revision to stable from negative reflects the recently enacted material increase in funding to the city’s pensions,” Fitch analysts led by Arlene Bohner said in a report. “The chronic underfunding of pensions over many years has resulted in a high and growing long-term liability burden and constrained expenditure cutting flexibility.”

The $34 billion shortfall across the city’s four pension funds is straining Chicago’s budget and ability to serve its residents. On Aug. 3, Mayor Rahm Emanuel released a plan to keep the municipal workers’ pension from running out of money within a decade by raising water and sewer taxes. The fix, which still needs to approved by the city council, follows his move in May to get the laborers’ pension to 90 percent funded by 2057. In October, Emanuel pushed through a record property-tax hike to increase funding for the police and fire pensions.

Investors have praised that progress. Chicago’s most-actively traded debt over the last month changed hands at an average price of 91 cents on the dollar on Tuesday, according to data compiled by Bloomberg. That’s up from 87 cents on Aug. 3, the day Emanuel released his plan to shore up the municipal workers’ pension. The securities, which mature in 2042, yield 6.2 percent.

More than 35 cents of every dollar of the budget goes to pay debt and pensions, according to Moody’s Investors Service, which slashed Chicago’s rating to speculative grade last year because of the pension crisis. Fitch affirmed its BBB- rating on the city’s $9.2 billion of unlimited-tax-general-obligation bonds and the $536.7 million of sales-tax bonds. That is one step above junk.

“Fitch’s action today is proof positive that Chicago’s finances are moving in the right direction,” Emanuel said in an e-mailed statement. “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.”

To contact the reporter on this story: Elizabeth Campbell in Chicago at ecampbell14@bloomberg.net To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net William Selway

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© 2016 Bloomberg L.P

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Walt Alexander

Walt Alexander

Walt Alexander is the editor-in-chief of Men of Value. Learn more about his vision for the online magazine for American men with the American values—faith, family & freedom—in his Welcome from the Editor.

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