Chicago Wins Fitch Upgrade on Strides Made for Economy, Debt

Chicago earned an upgrade from Fitch Ratings Thursday thanks to the city’s improving economy and diminishing long-term debt burden.

(Bloomberg) — Chicago earned an upgrade from Fitch Ratings Thursday thanks to the city’s improving economy and diminishing long-term debt burden.

Fitch boosted the rating of the third-largest US city one notch to BBB+, up from BBB, and now three notches above junk, with a stable outlook. It’s the second upgrade for Chicago from the rating company in the last 12 months as the financial picture for the city improves. Less than a year ago, the city also shed its lone junk rating from Moody’s Investors Service.

Chicago’s finances have long been strained by a growing unfunded pension liability that’s reached about $35 billion, and more recently by the cost to care for thousands of new migrants arriving from border states. But, it’s fiscal trajectory has been improving following an infusion of federal pandemic aid, an economic rebound and efforts to better fund its retirement plans.

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The upgrade was “driven by a decline in the city’s long-term liability burden stemming from steady growth in the economic resource base and improved debt management practices,” Fitch wrote in the report.

The rating increase comes early in the first term of Chicago Mayor Brandon Johnson, a progressive Democrat who took office in May. Johnson is searching for new revenue to tackle the rising deficits forecasted for the years ahead while he also pushes to correct decades-long inequities endured by poor, minority residents amid emerging new challenges such as the migrant crisis.

“These additional upgrades reaffirm the fiscal stability of Chicago,” Johnson said in a statement. “The ratings not only prove the excellence of our City’s operational and financial management, but also confirm that we have the ability to attract additional investment, boost economic vitality, and further strengthen our City’s finances.”

Johnson’s $16.6 billion spending plan for 2024, unveiled last week, includes $187 million more in revenue than projected as recently as last month, thanks largely to rising tourism and recreation dollars that include hotels, boating, liquor and cannabis. 

“Fitch expects continued solid revenue growth driven by the strength and resilience of the city’s economy, excluding the effect of new or raised taxes and fees,” according to the report Thursday.  

Funding the retirement accounts of former city workers remains one of the city’s biggest financial challenges. 

“The depth of the city’s pension liability and its consumption of operating resources continues to constrain the city’s overall creditworthiness,” according to Fitch.

The ratings firm has seen improvements in the city’s debt and pensions since 2016.

Over the last several years, Chicago has ramped up its pension contributions to shore up its anemically funded retirement funds and the city plans to make advanced payments this year and next. It’s also been looking for ways to save on debt. The city expects to free up about $89 million from refunding bonds in the fourth quarter of 2024.

Still, Fitch warns that even with recent improvements, Chicago’s “liability burden remains high” compared to peers.

(Updates with Mayor’s comments in sixth paragraph.)

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