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Global Credit Research - 12 Jan 2017
New York, January 12, 2017 -- While unfunded pension liabilities will continue weighing on the City
of Chicago's (Ba1 negative) credit profile, plans to significantly
increase contributions with higher taxes is a favorable departure from
prior funding practices. However, the liquidity crisis at
Chicago Public Schools (CPS -- B3 negative) is worsening amid a continued
budget impasse at the state level, Moody's Investors Service
says in two new research reports released today.
While Chicago and CPS are legally separate entities with distinct credit
profiles, they share the same tax base and have some overlapping
In "City of Chicago: Frequently Asked Questions,"
Moody's says despite the city's expanding economy, revenue
growth, and healthy liquidity, its pension burden is likely
to remain among the highest of any rated, major local government
for many years.
"While Chicago's recent tax increases will provide revenue
to significantly increase pension funding, the city's unfunded
pension liabilities exceed seven times its revenue and are projected to
grow for at least 15 more years," says Matt Butler,
Vice President of Moody's.
Moody's says there is a limit on Chicago's ability to raise
taxes on its citizens and businesses, because each increase tempers
the appetite for further tax hikes that could be needed. Within
the last two years, there has been numerous tax increases by overlapping
governments, including Chicago, CPS and Cook County,
IL (A2 stable), with new revenue slated for funding pensions instead
of government services.
In a separate report, "Chicago Public Schools: Frequently
Asked Questions," Moody's states CPS' fiscal pressures
are intensifying due to depletion of reserves following years of imbalanced
operations, unrealistic budget assumptions, and escalating
"CPS' deteriorating credit profile reflects years of budget
imbalance which have completely drained operating reserves, leaving
the district with minimal protection against further budget pressures,"
said Naomi Richman, Managing Director of Moody's.
Coinciding with the sharp drop in fund balance, CPS' liquidity
has fallen considerably and the district has turned to issuing short-term
tax anticipation notes to support its operations. Its recent $730
million offering is strictly for capital improvements and cannot be used
for operating expenses.
CPS has also assumed material growth in state aid that for the last two
years has not materialized, worsening its budget imbalance.
Rising pension costs have also exacerbated CPS' finances and these
costs will continue to grow annually.
Moody's says CPS could consider more difficult options to address
its finances should the State of Illinois (Baa2 negative) be unable or
unwilling to provide additional relief: levy for debt service on
GO alternate revenue bonds, stop making employer pension contributions,
or seek state authorization to file for Chapter 9 bankruptcy.
As CPS' credit deteriorates, it could have an impact on the
city's credit profile. CPS is integral to Chicago's
economy and tax base, and CPS' budget pressures could impair
the city's ability to raise revenue.
Should CPS levy for debt service, the subsequent property tax increase
for Chicago residents and businesses could weaken the city's political
and practical ability to increase tax revenues in the future.
The Chicago report is available to Moody's subscribers at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1049276
and the CPS report is available to Moody's subscribers at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1044062.
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Vice President - Senior Analyst
Public Finance Group
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MD - Public Finance
Public Finance Group
Moody's Investors Service, Inc.
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