Moody's Investors Service downgraded Chicago's credit rating to Baa2 on Friday, citing concerns over the city's “highly elevated” unfunded pension liabilities.
The ratings statement noted that “even if recent pension reforms proceed and are not overturned in legal appeal,” the city's pension liabilities and the “cost to service those liabilities” will “continue to grow, placing significant strain on the city's financial operations.”
Chicago's outlook remains negative, Moody's said. The city faces roughly $20 billion in unfunded pension liabilities across its four funds: the $5.1 billion Chicago Municipal Employees' Annuity & Benefit Fund, $1.4 billion Chicago Laborers' Annuity & Benefit Fund, $3.3 billion Chicago Policemen's Annuity & Benefit Fund and $1.1 billion Chicago Firemen's Annuity & Benefit Fund.
Last week, lawsuits challenging the constitutionality of pension benefit cuts for participants in the Chicago Municipal Employees' Annuity & Benefit Fund and Chicago Laborers' Annuity & Benefit Fund were put on hold pending an Illinois Supreme Court ruling on state pension reforms.
The city pension fund lawsuits challenge the legality of a 2014 Chicago pension reform law aimed at reducing a $9.4 billion funding shortfall across the two funds by raising employee and employer contributions and reducing retiree cost-of-living adjustments for participants in the two pension funds.
A status hearing is scheduled for April 22.
Meanwhile, oral arguments in the state pension reform case are scheduled for March 11. In November, a Sangamon County Circuit Court judge sided with employee and retiree organizations that argued a 2013 Illinois pension reform law violates the state's constitutional clause that pension benefits “shall not be diminished or impaired.” Attorney General Lisa Madigan's office appealed that decision to the state Supreme Court, arguing that the law is a “reasonable and lawful response” to the state's pension funding crisis.
Moody's noted that Chicago's debt could be downgraded further if the 2013 Illinois pension reform law or 2014 Chicago pension reform law are thrown out.