Moody's Downgraded Chicago, Cook County and Illinois Because of Unfunded Pension Liabilities and Rising Costs; Illinois Lost $20.4 Billion of Annual Personal Income Between 2000 and 2010

source: @dvolatility
Illinois, Cook County and Chicago were all downgraded by Moody's Investors Service recently because of their unfunded pension liabilities and rising pension costs. After Detroit defaulted on its debt and pension liabilities and filed for bankruptcy, some people think Chicago could be next if its pension costs keep rising and its tax base deteriorates (1, 2). The Moody's report also said, "The city's budgetary flexibility is already burdened by high fixed costs, including unrelenting public safety demands and significant debt service payments." Chicago is definitely not Detroit, but it doesn't mean that things can't get worse from here.

Meredith Whitney once said that state flight (lost income and tax revenue) remains a big risk for distressed states like Illinois (see California, New York and Michigan as well). She was right. According to, Illinois lost $20.4 billion of annual personal income between 2000 and 2010 (map below). And this doesn't include the 2011 tax hikes. According to the Illinois Senate Republicans, "Unfortunately, the situation may be worse given the fact the statistics were compiled prior to the massive increase in the Illinois income tax rates, 67 percent for individuals and 47 percent for businesses, passed by Democrats in January of 2011."


Here's what Moody's said about its downgrades of Chicago and Cook County, Illinois.

Moody's downgrades Chicago to A3 from Aa3, affecting $8.2 billion of GO and sales tax debt; outlook negative (July 17, 2013, emphasis mine):

The downgrade of the GO rating reflects Chicago's very large and growing pension liabilities and accelerating budget pressures associated with those liabilities. The city's budgetary flexibility is already burdened by high fixed costs, including unrelenting public safety demands and significant debt service payments. The current administration has made efforts to reduce costs and achieve operational efficiencies, but the magnitude of the city's pension obligations has precluded any meaningful financial improvements. These credit challenges are balanced against key credit strengths that support the A3 rating, particularly Chicago's long-standing role as the center of one of the most diverse economies in the nation and its broad legal authority to generate revenues from a large property tax base and a larger sales tax base.

The negative outlook is based on the dramatic spike in annual pension payments scheduled to take effect in the 2015 budget year (payable in 2016) under state law, which will place material strain on the city's operating budget. The outlook incorporates the likelihood of continued growth in unfunded liabilities in the city's four pension plans given currently suppressed contributions from the city. The outlook also reflects the State of Illinois' (A3/negative) constitutional protection of pension benefits. Given this framework, in order for the city to realize any significant alleviation in pension costs, the Illinois General Assembly would need to enact pension reform legislation that ultimately withstands inevitable litigation.

Moody's downgrades Cook County, IL to A1 from Aa3, affecting $3.7 billion of general obligation debt; outlook remains negative (August 16, 2013):

The downgrade of the GO rating reflects Cook County's growing pension liabilities due to, in part, a statutory funding requirement that is not tied to the health of the County Employees' and Officers' Annuity and Benefit Fund of Cook County (the Fund), resulting in a growing disparity between the fund's actuarially required contribution (ARC) and its actual employee and employer contributions. Additionally, approximately 50% of the county's tax base includes the city of Chicago (GO rated A3/negative outlook), resulting in a significant overlapping long-term liability burden. These considerations are balanced by the county's key credit strengths, including a large tax base that comprises the second most populous county in the nation, inclusive of numerous communities with strong demographic profiles; broad revenue raising flexibility inherent in the county's home rule status; recent stabilization of financial operations across multiple funds; and a strong management team that continues to implement best practices across all lines of county business. Additionally, the A1 rating reflects the county's demonstrated willingness to pursue pension reform.

The negative outlook reflects the formidable hurdles facing the county in its quest to pursue meaningful pension reform. Changes to the Fund, including employer contributions and benefits received by plan participants, must be enacted at the State of Illinois (GO rated A3/negative outlook) level. The General Assembly's legislative paralysis to date with respect to enacting its own pension reforms may further delay the county's attempt to present a reform package, despite having a significantly developed plan. Further, strong constitutional protections for pension benefits may result in a legal challenge that could further delay the implementation of reforms.

Related downgrades and links:

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