(Bloomberg) -- Chicago’s credit rating is at risk as Mayor Brandon Johnson and the city council spar over how to close a nearly $1 billion deficit in next year’s budget.
S&P Global Ratings late Tuesday put the city on “CreditWatch with negative implications” as officials mull one-time measures to close the shortfall. While the firm affirmed its BBB+ rating, analysts see at least a one-in-two chance of a cut in the next three months. A downgrade hinges on the 2025 budget passage and whether the gap is closed with one-time fixes rather than structural changes, Scott Nees, an S&P credit analyst, said in a statement.
“The negative watch indicates S&P’s concern that Chicago may undo years of budgetary discipline, which is valid,” Dennis Derby, a portfolio manager for Allspring Global Investments LLC, said on Wednesday. “There is time to work through budgetary issues constructively and should that fail to occur, the city’s credit profile would weaken.”
The city is staring down a $982.4 million shortfall next year and Johnson faces mounting fiscal challenges such as rising pension and labor costs that make his progressive agenda increasingly difficult to implement. Plus, federal pandemic aid is running out, revenue is falling short of expectations and woefully underfunded pensions are testing the third-largest US city.
Last week, the Chicago City Council rejected Johnson’s plan to raise property taxes by $300 million that would have helped close the gap, forcing the mayor to find alternative ways to balance the budget. During a press conference on Tuesday, Johnson said he was considering a $150 million property tax hike as well as boosting the tax on cloud computing and other levies to generate revenue.
“We believe that this budget could represent a critical juncture for the city’s credit trajectory, as failure to implement structural solutions to contain the deficit will only defer action on hard choices that are likely necessary to place the city’s finances on a sustainable footing,” S&P analysts wrote in a report evaluating the credit.
Sluggish Revenue
The city already enacted a hiring freeze in September and curbed other expenses to save costs. A city spokesperson didn’t provide a comment on S&P’s move.
“With COVID-era surplus funds now largely expended or being used to close the fiscal 2025 budget gap, Chicago’s ability to manage the budget deficit will have diminished going into the next budget cycle,” according to S&P. The company said that sluggish revenue performance and rising costs for personnel and pensions are projected to push the deficit to $1.1 billion in 2026 and $1.3 billion in 2027.
The current rating, three steps above junk, is “untenable in the face of such a large structural deficit in the absence of a clear and politically actionable plan for addressing it,” S&P said.
S&P also warned that the likelihood of Chicago ending the year without an adopted spending plan has increased after budget hearings have already been delayed by several weeks and because of the “politically fraught nature of budget negotiations thus far.”
Allspring’s Derby is waiting to see how the discussions move forward.
“We expect to see some budgetary discussions over the near term, and so long as there is an earnest dialogue, the city’s credit profile should remain robust,” Derby said.
Fitch Ratings on Wednesday affirmed Chicago’s rating at A-, one step higher than S&P, with a stable outlook but still cautioned that “rating stability is predicated on Chicago’s ability and willingness to continue to adhere to sound fiscal practices.”
“A reversion to its prior pattern of reliance on non-recurring solutions, aggressive revenue assumptions, and new recurring spending or revenue cuts without offsetting actions would trigger negative rating action,” according to Fitch.
(Updates with analyst comment, Fitch report starting in third paragraph.)
©2024 Bloomberg L.P.