Chicago won its first upgrade from Fitch Ratings Inc. in more than a decade, a sign that the Windy City is finally starting to turn its beleaguered finances around.
Fitch boosted Chicago’s debt ratings to two notches above junk on Friday, citing the city’s improved financial position and increased payments into its pensions. It also held a positive outlook, suggesting that more upgrades could come in the next year or two, Mayor Lori Lightfoot’s office said in a statement.
Chicago’s severely underfunded pensions have dragged down its credit for years as officials work to close persistent funding gaps. The Windy City paid required contributions to all four pension funds for the first time ever in 2022, and Fitch’s upgrade will give Lightfoot a boost as she seeks to sell bonds next month.
People often view the city as being “in a declining financial situation,” Chicago Chief Financial Officer Jennie Bennett said Friday in an interview. “But the Chicago financial turnaround is now, and the Fitch rating upgrade acknowledges that from an independent third party.”
Lightfoot, who is running for re-election this year, is also seeking to pass her 2023 budget. She proposed spending of $16.4 billion for next year, which includes an additional $242 million in early pension payments after the city increased its annual contributions by $1 billion in the past three years.
Chicago is now rated BBB by Fitch, up from a previous BBB- rating. This was the first Fitch upgrade since 2010, when the city’s got a boost by a change in ratings methodology that affected all credits nationally. If that’s put aside, Friday’s upgrade would be the first based on improved finances since Fitch began rating Chicago bonds in 1999.
Bond sale
The move comes ahead of a $757.4 million bond sale that is expected to price the week of Nov. 28, according to Fitch. The money raised will help fund community development and infrastructure projects. The ratings action, city officials say, will save the city approximately $100 million on every $1 billion borrowed.
Bennett anticipates that the city will also “get acknowledgment from the other rating agencies for all the financial accomplishments.”
S&P currently rates Chicago’s general-obligation bonds as BBB+, three notches above junk. The city still retains a junk rating from Moody’s Investors Service, which cut Chicago bonds to Ba1 in 2015 due to the city’s unfunded and growing pension liabilities.
Fitch’s BBB rating “reflects Chicago’s improving pension funding practices, its commitment to maintaining a sound reserve position, and ability to institute structural budget measures that improve its capacity to respond to future cyclical challenges,” the ratings company said in a statement.
The upgrade is a win for Chicago, which was recently able to nix a planned property tax hike thanks to improvements in city revenue.
Chicago is cashing an initial $40 million check from Bally’s for the city’s new casino, which officials estimate will generate nearly $70 million in revenues in 2023, according to a Friday S&P Global Ratings report.
New revenues
“Finding new revenue sources was critical for Chicago to regain structural balance, and the city identified several, including the addition of casino gambling,” S&P analysts wrote in their report.
Aside from improved pension funding, the Windy City also benefited from $1.9 billion in federal funding via the 2021 American Rescue Plan Act, the lion’s share of which has been allocated to one-time expenditures in housing, community development and other areas through the Chicago Recovery Plan. The money will be spent over the next several years.
