When Moody's Investors Service downgraded Chicago debt to junk status, it ramped up pressure on other ratings agencies, giving them something else to ponder in deciding how soon to act.
Moody's announcement on Tuesday preceded — and threatened to short-circuit — city efforts to refinance $900 million in variable-rate debt and borrow $200 million to pay off interest-rate swaps and avoid termination fees and other financial penalties associated with a lower credit rating.
While Moody's has dropped the city's debt rating by seven notches — to Ba1, one level below investment grade — since mid-2013, Standard & Poor's Rating Services has maintained an A+ rating — five notches from the top — for more than four years.
The six-notch spread is the widest for any city, creating challenges for debt traders.
S&P warned last week that it, too, could lower the city's rating by more than one notch. But it gave the city breathing room, indicating a downgrade would happen only if the city failed to implement a plan by the end of this year to “sustainably fund” its pension contributions, or if it “substantially” draws down its reserves to do so.
Chicago pension funds are underfunded by about $20 billion.
After Moody's acted on Tuesday, Fitch Ratings, which rates Chicago debt A-, said it was "in contact with city management and will assess the rating impact of the recent downgrade."
Mike Belsky, a former group manager in public finance for Fitch in Chicago, contends that Moody's acted prematurely, underestimating Chicago's "booming economy" and City Hall measures to work out of its pension mess. He adds, "S&P puts more weight on underlying economics than Moody's."
Mayor Rahm Emanuel termed Moody's decision "irresponsible." Meanwhile, on Wednesday, Moody's downgraded Chicago Public Schools debt to three grades below investment quality and lowered the Chicago Park District's debt rating to match the city's.
The city maintains that its pension situation is different from the state's. It argues that if changes to Chicago's pension system are overturned, the city won't be on the hook for obligations of municipal and laborers funds. Instead, the city will revert to a multiplier-based funding obligation, it says, "and the funds will go broke in 10 and 13 years, respectively."
Some municipal market veterans expect S&P and Fitch to issue downgrades on Chicago debt soon, but possibly not until after seeing what the Illinois General Assembly does about the pension bomb before adjourning later this spring.
Rating agencies tend to act more in lockstep when upgrading ratings than downgrading them, according to municipal finance officials.
Moody's downgrade of city debt came just days after the Illinois Supreme Court on Friday ruled unconstitutional pension law changes the Legislature had enacted in 2013.