No matter how or when Chicago’s second straight budget stalemate ends, one thing is certain: the bond rating that determines city borrowing costs is in real danger of dropping just one notch above junk status.
The political standoff that threatens to bring about a first-ever shutdown of city government is enough to trigger a drop from Wall Street rating agencies, whose grades are watched by investors craving certainty.
Also factoring into a potential bond rating downgrade is the City Council’s reluctance to raise property taxes, and Mayor Brandon Johnson’s continued reliance on one-time revenues — including a record $1 billion tax increment financing surplus, scaled-back advance pension payments, and a push to borrow $449 million for firefighter back pay and police settlements.
Another drop in Chicago’s bond rating may not mean much to the current generation of Chicago taxpayers. But it will mean plenty to their children and grandchildren.
It would make city borrowing costlier and could impede the city’s ability to borrow at a time when it needs to rebuild aging infrastructure, grapple with climate change and replace shrinking federal and state funding.
“The danger is that it will be incredibly expensive to issue a lot of debt,” said Dana Levenson, who spent three years as Chicago’s chief financial officer under former Mayor Richard M. Daley. “It’ll be at a higher price and the property tax will be impacted. That’s where the average Joe gets affected.”
Levenson said Chicago has no choice but to issue general obligation debt backed by property or sales taxes. It’s the only way to bankroll upkeep of roads, bridges, sidewalks and other infrastructure that every city needs to function.
Matt Fabian, a partner in Municipal Market Analytics, an independent research group focused on municipal bonds, said the impact of a dangerously low bond rating will be heightened because cities and states are “heading into a period of sustained growth in borrowing,” with inflation and climate change increasing the need for infrastructure that costs more.
“As the lake rises, Chicago will need to construct infrastructure to keep the lake out of Chicago. That’s won’t be an optional thing over time as the federal government pushes policy responsibilities down to the states and the cities,” Fabian said.
Municipal Market Analytics is a firm that’s been bullish on Chicago in recent years. But Fabian said he’s turned pessimistic.
“We tell bond raters to assume that the city’s rating will be downgraded, and that you’ll see more downgrades than not in the coming years,” Fabian said.
“The failure to cut spending. Their reliance on one-time budget gimmicks is just not a sustainable practice and their inability to get approval for meaningful revenue hikes — whether it’s from the City Council, the state or the mayor himself… That suggests a barely investment grade credit,” Fabian added. “I don’t tell people that the city is going back to junk ratings, but it’s going to approach junk ratings.”
City once enjoyed bond rating upgrades
Until Johnson took office, Chicago was holding its own on Wall Street and even improving its standing.
Former Mayor Rahm Emanuel did much of the dirty work that Daley avoided by doubling Chicago’s property tax levy for police, fire and teacher pensions, pushing through two telephone tax hikes for the Laborers pension fund, and phasing in a 29.5% surcharge on water and sewer bills to bankroll the Municipal Employees pension fund, the largest of the four.
Emanuel also persuaded the Illinois General Assembly to give the Chicago Public Schools a $450 million cash infusion and bankroll teacher pensions going forward.
The momentum continued under former Mayor Lori Lightfoot, who convinced a reluctant City Council to approve an automatic escalator locking in annual property tax increases at the rate of inflation.
With help from billions of dollars in federal pandemic relief funds, Lightfoot also started making annual pension payments over and above the annual contribution mandated by the state law that requires city employee pension funds to be 90% funded by 2049.
Wall Street rating agencies liked what they saw and rewarded Chicago with a series of bond rating upgrades and improved credit outlooks.
When Lightfoot left office, she claimed Chicago was in great financial shape with an $85 million shortfall that was among the lowest in recent history. That was due in large part to the billions in federal pandemic relief funds that she used to hire hundreds of new employees and add scores of new programs that became a permanent part of the city budget.
The momentum ground to a halt when Johnson took office during the worst moments of the migrant crisis.
Johnson chose the easy way out, instead of following the political playbook that advises Chicago mayors to raise taxes in the first budget after taking office, which gives voters three years to forget before the next election.
He held the line on property taxes and other major tax increases in a first budget that relied heavily on one-time revenues. Then he tried and failed to deliver on his campaign promise to tax the rich by convincing voters to raise the transaction tax on high-end real estate transactions to create a dedicated funding source to combat homelessness.
That set the stage for last year’s budget stalemate. Johnson proposed a $300 million property tax increase that was unanimously rejected by an emboldened City Council that refused to raise property taxes by any amount.
The political standoff ended in a 27 to 23 vote shortly before Christmas that prompted Standard & Poor’s to drop Chicago’s bond rating to two notches above junk.
Progressive Caucus Co-Chair Andre Vasquez (40th) said Johnson was “irresponsible taking the C.P.I. out to begin with in the first year of this term, and for not doing any kind of real revenue last year. We’re in a bigger problem now. We’re going to be in an even bigger problem next year.”
More recently, S&P Global Ratings reduced Chicago’s credit outlook to negative, citing Johnson’s decision to cut in half the city’s annual pension advance over and above the state mandated payment.
Chicago has more debt per capita than any big city in the nation. Johnson has added to the pile and now wants to add billions more as part of the 2026 budget.
‘Yet another one-time fix’
Lisa Washburn, managing director and chief credit officer at Municipal Market Analytics, highlighted a troubling trend that could set off more alarms on Wall Street.
Chicago has “reshuffled” its debt from general obligation bonds backed by property taxes to sales tax securitization bonds that carry a lower interest rate. And, the city has “taken the savings up-front to create cash-flow space,” she said.
“They front-load the savings to provide budget relief instead of making tough decisions. It benefits today’s budget, instead of tomorrow’s. Eventually, they run out of this cash machine and taxpayers will have to pay,” Washburn said. “This is yet another one-time fix. It’s not a recurring solution. Every time they do this, they’re going to have to find a recurring solution for that amount.”
Ald. Scott Waguespack (32nd), who served as Finance Committee chair under Lightfoot and was later ousted from that post by Johnson, said the next mayor — or Johnson, if he wins an uphill battle for a second term — will have “no good choices. You won’t be able to do flashy new programs. The financial walls are closing in.”
To stave off another drop in Chicago’s bond rating, Waguespack is leading the charge for an alternative budget without a corporate head tax that includes budget cuts, union concessions, a $260 million pension advance, a $900 million TIF surplus and no borrowing for firefighter pay raises.
But Levenson said the larger and longer-term threat to Chicago’s financial future is the city’s $35.8 billion pension crisis. Three of Chicago’s four city employee pension funds have assets to cover less than 25% of future liabilities even before a police and fire pension sweetener signed by Gov. JB Pritzker added billions to the liability.
That, Levenson said, will be the likelier reason why the city goes “down the path of New York,” referring to the long road that nearly forced New York City into bankruptcy in 1975 after then-President Gerald Ford initially refused a request for billions in federal loans, only to relent after business and labor concessions were made.
“If you look at the funded level of the pensions, where were they ten years ago? Probably in the 40s. When I left the city, they were in the upper 60s. It’s been a long slog with a definite downward trajectory and nothing has been done about it other than Pritzker making it worse.”
On Wednesday, Johnson said he would like to fully fund the pension advance “so that we can move toward solvency quicker.” But he said the motivation behind the advance payment initiated by Lightfoot “was based on an economic climate that just doesn’t exist anymore.”
Asked whether he was concerned that the reduced pension advance would trigger another drop in Chicago’s bond rating, the mayor said, “What we have heard from them repeatedly is that they look at a whole bunch of factors, one of which is labor peace. And we’re the first administration since Richard M. Daley to actually move through an entire season without a labor stoppage.”