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Is city of Chicago facing bankruptcy? Credit as bad as Detroit’s

Chicago City Hall SignMoody’s Investors Service has downgraded the city of Chicago’s credit rating on a $388 million municipal bond issue from A3 to Baa1.  The other major American city with a rating this low is Detroit. Unfunded pension liabilities in the amount of $32 billion are almost eight times the city’s operating revenue and according to Moody’s “that is the highest of any rated U.S. local government”. This drastic reduction in Chicago’s credit rating is the second one in eight months.

According to a Moody’s spokesman, these pension liabilities “threaten the city’s fiscal solvency.” In addition, the city’s financial health was given a “negative outlook.” The Moody’s report stated “Absent a commitment to significantly increase revenue andor materially restructure accrued pension liabilities and reduce costs, the city’s credit quality will likely weaken.”  If the city does not find a way to solve this issue the credit rating could go even lower.

Chicago Chief Financial Officer Lois Scott said in a prepared statement, “While we disagree with the action taken today by Moody’s, we do agree that the city’s pension challenges will have a direct impact on its long-term financial stability without reform.”

These words do little to help ease the fears of many current and retired city workers, who fear Chicago will face the same fate as Detroit. In Detroit, retired workers saw their pension benefits drastically reduced because of the city’s bankruptcy. Another credit rating service, Standard & Poor’s, did state however that Chicago, unlike Detroit, is in a better position to fix its issues.  But the city must find a way to resolve the status of its pension liabilities.