Chicago 2019 GO Bonds Assigned 'BBB+' Rating; Other Ratings Affirmed

CHICAGO (S&P Global Ratings) March 14, 2019--S&P Global Ratings has assigned 
its 'BBB+' long-term rating to the city of Chicago's series 2019A general 
obligation (GO) bonds. At the same time, we affirmed our 'BBB+' ratings on the 
city's outstanding GO bonds. The outlook is stable.

The city's full faith and credit GO pledge secures the bonds. It intends to 
use the series 2019A bond proceeds to fund capital projects and retire 
commercial paper. 

"The 'BBB+' rating reflects our view of the city's general creditworthiness, 
including its strong economy and budgetary flexibility, but weak management 
and very weak budgetary performance," said S&P Global Ratings credit analyst 
Carol Spain.

We expect that 2019 will be a period of near-term stability for Chicago, but 
we think that the following three years will test the city's willingness and 
ability to manage its budget in a sustainable manner. Building on stronger 
economic growth, dedicated tax increases to finance its four pension plans' 
required funding ramp-up, substantial anticipated savings from a sales tax 
securitization to address rising debt service, and absorbing a two-year police 
hiring surge, Chicago entered fiscal 2019 with a $97.9 million, or 3% 
corporate fund gap, the narrowest since 2007. Outside of continued significant 
underfunding of pension actuarially determined contributions, the fiscal 2019 
budget is largely structurally balanced. However, the city's fiscal 2020 
budget will be significantly more challenging. It has yet to identify funding 
sources for a large increase in police and fire pension contributions in 2020, 
and we anticipate that new police and fire labor contracts will grow wage 
expenses beyond baseline assumptions presented in the city's annual financial 
analysis. By 2023, the city will need an additional $1.2 billion in annual 
revenues to finance its pension funding ramp. We still view structural 
solutions to close the outyear gaps as feasible at this time, but if the city 
were to change course on structural solutions to address its escalating 
pension costs or its structural imbalance were to notably widen, we could 
change our view.

"The stable outlook reflects Chicago's progress in stabilizing its pension 
funds and placing them on a path to actuarial funding," added Ms. Spain, "as 
well as its narrowing budget gap and steps to more structurally align its 
budget." Although the quickly approaching pension contribution spikes are 
ominous, they are not insurmountable, in our view. We also view currently 
strong economic growth and the potential for a more collaborative relationship 
with the state as tailwinds as the city formulates its fiscal 2020 budget. We 
view the current rating level as incorporating the city's lingering structural 
misalignment and high fixed costs. 

"That said, significant downside risk to the rating remains," added Ms. Spain, 
"and if action to address the city's projected fiscal 2020 budget gap is not 
timely or the city backslides on its progress toward structural alignment on 
full actuarial pension funding, we could take a negative rating action."