Kroll Bond Rating Agency Publishes Special Report: Chicago’s Pension Liabilities – A Look Beyond Headlines and Ratios

NEW YORK--()--Kroll Bond Rating Agency (KBRA) published a special report today that examines the affordability of Chicago’s growing debt and pension obligations. KBRA notes that market interest in this topic intensified after Puerto Rico filed for protection from creditors and again after recent credit rating actions regarding Chicago’s debt by another rating agency.

In this report, KBRA examines the city’s and overlapping entities’ growing annual debt and pension obligations and models the potential impact of higher taxes on various types of households by income level, and on businesses, and in comparison to regional and national peers. The scenarios KBRA examined also include the potential for lower investment returns on pension fund assets.

For bondholders who are concerned about whether or not Chicago is an investment grade credit, “KBRA believes it is important to look beyond point-in-time ratios and hypothetical pension payment schedules that are sometimes used by others to populate scorecards and sort issuers into rating categories. Instead, KBRA assesses pension risk by exploring deeper questions regarding whether or not a municipality’s actual plans to fund pension obligations are sustainable and affordable.”

KBRA estimates the city and overlapping entities may need to identify roughly $1.6 billion of expenditure reductions or revenue enhancements to meet growing annual pension and debt obligations by 2023. KBRA believes the city’s need to raise taxes will be politically painful, but affordable.

“While tax burdens on households and businesses in Chicago may grow – actual property tax rate increases will likely be much less than many analysts project and, in KBRA’s opinion, will not result in total tax burdens that are so high as to impact the city’s position as the Midwest regional capital of commerce, culture, business, and education.”

Meanwhile, KBRA notes that “behavior matters when assessing municipal credit risk, and city leaders have demonstrated the political will necessary to execute their plans and protect bondholder interests despite numerous obstacles.”

“The challenges and risks related to the city’s severely underfunded pension plans are reasons KBRA rates Chicago BBB+ instead of a higher rating commensurate with the depth and diversity of its underlying economic base, effective management, improved financial controls, and ample reserves – conditions not present in situations like Detroit, Puerto Rico, and Stockton.”

To read the full report, click here.

Conference Call:

KBRA will host a conference call to further walk through the report on Thursday, July 27th at 11:00 am EDT. To register for the call, click here.

About Kroll Bond Rating Agency

KBRA is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO). In addition, KBRA is recognized by the National Association of Insurance Commissioners (NAIC) as a Credit Rating Provider (CRP).

Contacts

Kroll Bond Rating Agency
Analytical Contacts:
William Cox, 646-731-2472
Managing Director
wcox@kbra.com
or
Karen Daly, 646-731-2347
Senior Managing Director
kdaly@kbra.com
or
Harvey Zachem, 646-731-2385
Managing Director
hzachem@kbra.com
or
Alice Cheng, 646-731-2403
Associate Director
acheng@kbra.com
or
Justin Schneider, 646-731-2453
Analyst
jschneider@kbra.com

Contacts

Kroll Bond Rating Agency
Analytical Contacts:
William Cox, 646-731-2472
Managing Director
wcox@kbra.com
or
Karen Daly, 646-731-2347
Senior Managing Director
kdaly@kbra.com
or
Harvey Zachem, 646-731-2385
Managing Director
hzachem@kbra.com
or
Alice Cheng, 646-731-2403
Associate Director
acheng@kbra.com
or
Justin Schneider, 646-731-2453
Analyst
jschneider@kbra.com