(Bloomberg) -- Chicago’s credit rating is threatened as the city mulls using one-time budget-balancing measures to close a gaping shortfall, according to analysts from S&P Global Ratings.
The company put the city’s BBB+ credit rating on a negative watch on Tuesday, meaning there is at least a one-in-two chance it could be lowered in the next three months. A downgrade hinges on the passage of Chicago’s 2025 budget and whether a shortfall is closed with a reliance on one-time fixes rather than structural changes, Scott Nees, a credit analyst at S&P, said in a statement.
The city is starting down a nearly $1 billion shortfall next year and Mayor Brandon Johnson faces mounting fiscal challenges 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.
“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.
The city already enacted a hiring freeze in September and curbed other expenses to save costs.
“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.”
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