Last Friday, Moody’s Investor Services downgraded Chicago’s general obligation credit rating to Baa2, only two steps above “junk” status. The downgrade could also trigger the termination of swap agreements, forcing Chicago to pay an additional $58 million in penalties on those contracts. Additionally, there are 11 other swap agreements that are now closer to being terminated, which would cost the city an additional $133 million. This report should come as no surprise, as Chicago has allowed its debt to balloon for decades, pushing off reforms and closing operating budget gaps by issuing more debt.
At the heart of the problem is Chicago’s pension system, which includes retirement plans for municipal employees, laborers, policemen and firemen. Sister agencies of the city also included are the Chicago Teacher’s Pension Fund and park employees. In total, these pensions have unfunded liabilities of close to $32 billion according to Moody’s — equal to eight times the city’s revenue. In comparison, Detroit had only a $3.5 billion shortfall when it filed for bankruptcy.
Chicago will be facing some tough choices ahead as the city budget already has a $300 million structural deficit. Furthermore, the state of Illinois has passed legislation requiring the city to ramp up its