S&P places Chicago's GO bonds on watch negative

S&P Global Ratings placed Chicago's general obligation bond rating on watch negative Tuesday, warning the city against heavy reliance on one-time budget solutions, as reports suggest Mayor Brandon Johnson has slashed his proposed property tax increase in half in order to get his 2025 budget approved by the City Council.

"The CreditWatch placement reflects our view that there is at least a one-in-two chance of a lower rating in the next 90 days, pending the passage of the city's fiscal 2025 budget and our assessment of whether its credit quality has deteriorated due to heavy reliance on one-time budget-balancing measures, perpetuating a large outyear structural imbalance," S&P Global Ratings credit analyst Scott Nees said in a statement.

At the same time, S&P affirmed its BBB-plus rating on the city's GO bonds and assigned the same rating to Chicago's $110.5 million of Series 2024B GO refunding bonds.

The watch negative decision comes about a week after the City Council unanimously rejected the mayor's property tax increase and Kroll Bond Rating Agency placed the city on Watch Downgrade.

The mayor has since scaled back his proposed property tax increase to $152 million from $300 million, the Chicago Sun-Times reported. According to the paper, the mayor would compensate for the lost property tax revenue by raising the personal property lease tax on cloud computing, eking out efficiencies in administrative costs and raising the tax on streaming services.

"We are following the day-to-day developments, but budget negotiations remain fluid and have already brought us several surprises so far this year," Nees told The Bond Buyer. "So we really want to see what the final budget package that gets passed by City Council looks like before making a determination as to the credit significance of particular provisions being considered."

Municipal Market Analytics on Tuesday put the Chicago GO rating on notice, saying the city's "plans to cut city budget shortfalls with non-recurring solutions are undermining credit momentum, ratings and price performance," and Chicago needs to be more transparent about the debt service savings of the $1.5 billion refinancing that the City Council approved last month.

Regarding that refinancing, which S&P said "is designed to deliver front-loaded savings," Nees said the structure represents "a one-time measure that serves to plug a share of the budget gap in lieu of a structural solution."

S&P's July 2024 rating report included downside rating scenarios ? such as movement away from the advance pension funding policy, weakening in reserve or liquidity positions or changes that disrupt the city's revenue, expenditures, demographics or overall economic trajectory.

Nees added the BBB-plus rating "is unsustainable in the face of the very sizable outyear budget imbalance in fiscal 2026 and 2027 in the absence of a clear and politically actionable plan for containing this gap."

"Without structural measures in the 2025 budget sufficient to begin to stabilize the city's budget trajectory, the rating could be pressured," he said.

S&P said any new revenue that requires state authorization looks unlikely, given the time and political capital that would be necessary to pass anything like a tax on services or a graduated income tax.

"We've also seen little indication that [Chicago Public Schools] will obtain more revenue from the state, and it doesn't appear that's likely to change in the near future, either," Nees said. "Transit funding for [the Regional Transportation Authority] and [the Chicago Transit Authority] will likely be a front-burner issue in the coming legislative session, so we will be watching closely to see if any new funding is forthcoming and how this may impact the financial health of the transit agencies."

Chicago's finance department did not respond to questions by press time.

Fitch Ratings assigns the city an A-minus rating with a stable outlook. KBRA last week affirmed its long-term rating of A on the city's outstanding GOs and assigned the same rating to the city's forthcoming Series 2024B and 2024C refunding bonds. Moody's Ratings affirmed its Baa3 rating on Chicago early this year, with a positive outlook.