Fitch ratings agency has revised its outlook on Chicago, boosting it from negative to stable to reflect “the ongoing revenue recovery across the city and the significant infusion of federal fiscal aid,” easing pressure on the city’s books. But as ratings agencies frequently warn about Chicago: The city “still faces considerable financial challenges and the size of recent years’ budget gaps illustrate its sensitivity to economic setbacks.”
Fitch’s issuer default rating for the city and its general obligation debt remains at BBB-, meaning its expectations of Chicago defaulting on its debts are low. That rating is still one notch above junk. The city’s Sales Tax Securitization Corporation bonds have a higher AA- rating.
At this time last year, Fitch slapped the city with a negative outlook but affirmed its ratings, saying the mayor’s 2021 budget—which addressed a $1.2 billion gap—extended the city’s financial instability. Back then, the city was considering returning to the frowned-upon practice of issuing scoop-and-toss debt, and Chief Financial Officer Jennie Bennett said she was “not 100% sure” the city could get through the 2021 budget season without a ratings downgrade.
Now out of the worst of the pandemic’s economic impacts and flush with relief dollars, Chicago is on more sound footing, the agency says. “Federal stimulus has played a critical role in the city’s gap-closing plans, allowing time for revenue recovery while averting more significant cost-cutting measures and/or use of reserves.” The estimated budget gap for 2022 is $733 million, down from that $1.2 million last year and $886 million in 2020.
Mayor Lori Lightfoot’s budget is slated for a final vote on Wednesday—which includes $4.4 billion in planned borrowing—but the agency warns there are still lingering issues.
The city has a high and growing long-term liability burden, a heavily unionized workforce and faces high debt and pension costs. “Meaningful cost-cutting actions will likely become more difficult to achieve over time, emphasizing the importance of Chicago’s revenue recovery,” the Fitch analysis continued.
In the plus column: The city has solid reserves—totaling $1.05 billion—and Chicago is the economic hub for the Midwest. The local labor market has improved, but the city’s unemployment rate is still high—at 9.2% as of August, compared to 4.1% in 2019, Fitch notes. The city could see an upgrade if the city goes through “a period of sustained structural budgetary balance” while keeping its reserves strong. Continued economic growth, bigger revenue gains and smaller budget gaps would help as well.
In July, Moody’s Investor’s Service changed its outlook on $7.1 billion in Chicago outstanding general obligation debt from negative to stable.