[March 24, 2015]

Kroll Bond Rating Agency Assigns A- Rating with a Stable Outlook to Outstanding City of Chicago, Illinois General Obligation Bonds

Kroll Bond Rating Agency (KBRA) has assigned a long-term rating of A- with a stable outlook to the outstanding General Obligation Bonds of the City of Chicago, Illinois. The City has approximately $8.3 billion in outstanding General Obligation bonds. The rating is based on KBRA's U.S. Local Government General Obligation Rating Methodology, published on May 31, 2012.

The rating reflects management initiatives that have improved the stability of operations by reducing reliance on non-recurring revenues. This rating also recognizes the City's substantial tax base and deep and diverse economic base commensurate with its position as the nation's third largest city. Chicago is home to more than 400 corporate headquarters, and numerous Fortune 500 companies. Cultural institutions abound, total visitors exceeded 50 million for the first time in 2014. Population growth has resumed since 2010, and unemployment rates are at post-recession lows. The recent sale of the Willis Tower for a record price underscores the health of the commercial base.

Ample available financial reserve balances supplement a narrow Corporate Fund reserve and liquidity position. The City is making progress in achieving structural balance. Home rule authority coners significant additional operational flexibility, although willingness to raise property taxes remains to be demonstrated.

The rating also takes into consideration the significant pension financing challenges that the City must confront. These include the sheer size of the looming fiscal 2016 payment spike to meet police and fire pension requirements as actuarial funding begins. The City also faces sizable growth in its employer contributions for its Municipal Employees Annuity and Benefit Fund and Laborers and Retirement Board Annuity and Retirement Fund. In addition, an adverse outcome of litigation involving the latter two bargaining groups has the potential to unwind favorable reform progress. City financial operations continue to rely on economically sensitive revenue sources, which are subject to volatility during economic downturns. Debt levels are relatively high, reflecting both direct City issuance and debt of overlapping jurisdictions. Bond amortization is slow, and characterized by the use of "scoop and toss" refundings to augment operating resources.

The stable outlook reflects an improving local economy, significant progress made in aligning revenues and expenditures and reducing the structural budget deficit, and recent State legislation, which provides a roadmap for addressing the chronic underfunding of two of the City's pension funds. While KBRA also recognizes the challenges of litigation, and the financial risks and uncertainty posed by the sharp ramp-up in revenues needed to fund pensions on an actuarial basis, particularly police and fire pensions, KBRA's outlook assumes that management will continue to operate in a fiscally responsible manner. The outlook also reflects an expectation that the State Legislature will enact some form of police and fire pension reform that will ease-in the looming dramatic required funding increases, since this is a state-wide issue, not unique to Chicago.

To view the report, please use the following link:

https://www.krollbondratings.com/show_report/2057

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