Fitch: Chicago Revenue Increase Positive, Long-Term Risks Remain

NEW YORK--(BUSINESS WIRE)-- Chicago's 2016 proposed budget plan, if adopted, would be a positive credit development, as it would demonstrate willingness to raise recurring revenues for the city's rising pension expenses, Fitch Ratings says. The plan shows progress toward structural budgetary balance, but vulnerabilities remain.

Pension requirements present a formidable challenge to the city. They will rise significantly in 2016. The proposed plan identifies revenues to cover that increase without using reserves. However, it also relies on nonrecurring measures for balance. While the nonrecurring portion of the budget would be lower than in previous years, total reliance on recurring measures would improve credit quality.

The proposed budget includes a $543 million, multiyear property tax increase, including a proposed revision to the 2015 levy to accommodate the statutorily required increase in police and fire pension payments. This would be a 58% rise over the city's 2014 property tax levy but a 13% increase to the total tax levy, which includes overlapping taxing districts. The proposed budget also includes other new revenues, including new garbage and rideshare service fees.

The property tax increases are matched to the general government portion of the phased-in increases for police and fire pensions that would be required under Senate Bill 777: $318 million in 2015 (for 2016), $109 million in 2016, $53 million in 2017 and $63 million in 2018. It was passed by the House and Senate earlier this year but has not been sent to the governor for his signature. If it does not become an Illinois law in 2015, the city would be required to fund the entire incremental payment amount of approximately $540 million in 2016 from additional property taxes or other potentially nonrecurring means.

Fitch maintains a Negative Outlook for the city's 'BBB+' general obligation rating and has said that the rating is likely to be downgraded unless the city implements solutions that move all of the pension plans on a clear path toward adequate, actuarially-based funding while also making progress toward a balanced budget. This may become even more challenging if the Illinois Supreme Court strikes down the city's reforms to the Municipal and Laborers' pension plans. The city's reserves, including those in the general fund as well as the long-term reserve funds, are an important aspect of the city's overall credit quality. Drawing on those reserves for pension payments or operations could also trigger a rating downgrade.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150923006254/en/

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Source: Fitch Ratings

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