Credit rating agency Fitch downgraded $10 billion of Chicago’s municipal debt to one level above junk Monday, and warned that America’s third-largest city is in a perilous financial situation.
According to a release from Fitch, the firm cut the city’s rating two levels from BBB+ to BBB-.
Any ratings drop now would put the city into junk bond territory. S&P also has Chicago’s rating one notch above junk territory and the third agency, Moody’s, already has the city’s bonds as junk.
Fitch cited a Illinois Supreme Court ruling on the city’s pension funds as one of the main causes for the downgrade.
“Fitch believes last week’s Illinois Supreme Court ruling striking down pension reform legislation for two of the city of Chicago’s four pension plans was among the worst of the possible outcomes for the city’s credit quality,” said the release.
“Not only did it strike down the pension reform legislation in its entirety, but it made clear that the city bears responsibility to fund the promised pension benefits, even if the pension funds become insolvent.”
Without the ability to restructure the debt, the city must raise new funds and cut costs, which is a much tougher task according to Fitch.
There was some upside, according to the credit rating agency. Chicago remains one of the main hubs for business in the Midwest and the city has a strong, well-educated workforce to boost the economy.
The troubles in the Windy City have been brewing for some time now, with investment giant Alliance Bernstein saying it could be “the next Detroit” due to their massive pension shortfall.
In addition to the downgrade, Fitch maintained a negative outlook for the City’s debt.