In a surprising move to help resolve Chicago’s largely underfunded pension funds, the Kroll Bond Rating Agency (KBRA) upgraded the city’s bond rating two notches.
Following its annual outlook on the state’s financial situation, the Wall Street agency’s decision to upgrade the city from a BBB+ to an A “reflects identification and dedication of permanent ramp-up revenue sources to address severely underfunded pensions, and KBRA’s expectation that addressing these pension obligations long term will prove to be affordable and sustainable for the city’s wealth base.”
Chicago Mayor Rahm Emanuel expressed his gratitude for Kroll’s upgrade, calling it a reflection of “seven years of work to put our pensions on a path to solvency, address legacy debt issues, and reduce the structural budget gap.”
“While there is still more work to do, today Chicago is on firmer financial footing because we came together to address the financial challenges we inherited with real solutions,” he said in a statement. “Today, as a result, we can invest in Chicago’s future with certainty, we can provide taxpayers certainty about the city’s direction and we can provide businesses the certainty they need to create more jobs for residents across the city.”
This revelation is a head-scratcher, as Moody’s Investors Service nearly downgraded the city to “junk” bond status last year. According to the Chicago Tribune, Moody’s is still categorizing Chicago’s debt as such. In addition, the Illinois pension system was under 40% funded in the last fiscal year.
While Kroll agreed with Moody’s sentiments that annual contributions will need to increase significantly from 2020 to 2023, with hopes that Chicago can collect $864 million more per year by 2022, it showed more optimism than Moody’s in terms of Chicago getting the job done.
“KBRA believes the City’s management team has been proactive in implementing necessary measures to stabilize and improve financial operations. This follows a period characterized by structural budget deficits and the use of non-recurring sources in the prior administration,” Kroll said in a statement. “KBRA notes that Chicago exhibits characteristics of an important world business center and houses one of the world’s largest and most diversified economies.”
Most recently, Illinois lawmakers have been entertaining the idea of a bond sale almost as large as its entire obligation, but it’s unlikely that the measure will pass should the state’s Republican Gov. Bruce Rauner be re-elected come November. However, coupled with other credit agencies following Kroll’s bold upgrade, the bond sale would have a higher chance under a Democratic administration.