Moody`s downgrades Chicago`s debt rating - MyFoxAustin.com | KTBC Fox 7 | News, Weather, Sports

Chicago bond rating slashed over `unrelenting` crime, pension liability

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CHICAGO (Associated Press) -

Wall Street lowered the boom and credit ratings of Chicago, Evanston and Elk Grove Village, blaming the state of Illinois' failure to enact public employee pension reform and recognizing the ongoing violence in Chicago as a contributing aspect.

Taxpayers in all three towns will have to pay more in interest rate charges, especially Chicago, which was whacked with an unprecedented triple downgrade.

Getting most of the blame is the soaring cost of public employee pensions.

The agency said late Wednesday it's lowering its rating of the nation's third-largest city from Aa3 to A3.

The ratings for general obligation debt and sales tax debt are still investment grade. But Moody's says the outlook is negative because of "formidable legal and political barriers to pension reform" in Illinois.

In a statement on their website, Moody's acknowledges the city's violence problem, citing "unrelenting public safety demands" as a burden to the city's budgetary flexibility.

The downgrade affects $8.2 billion in debt and means it will cost more for the city to borrow money.

Moody's says Chicago has a $19 billion unfunded pension liability, and will face "tremendous strain" in future operating budgets as city officials try to meet funding requirements and public safety demands.

Budget watchdog Laurence Msall said the credit rating downgrade by Moody's Investor Services would likely cost local taxpayers hundreds of millions of dollars in higher interest payments.

"Everything the city does is going to be affected by having to spend more to borrow to operate the government," Msall says. "Fewer resources available for all sorts of priority areas."

Governor Quinn and Mayor Emanuel have been promising public employee pension reform for years now, but Wall Street appears to doubt that the Illinois General Assembly will ever enact it, citing political and structural obstacles in Springfield.

The president of the police officers' union told FOX 32 News that public employees should not accept reduced retirement benefits.

"There is a problem. But the problem is about revenue, not about benefits," Michael Shields, President Fraternal Order of Police says.

Shields proposes that City Hall give the police pension fund ownership of Midway Airport as well as proceeds of any future Chicago casino. Other public employee unions, including AFSCME, want another increase in the Illinois income tax, focused on the "rich," a term they decline to define.

Msall warned that could devastate the local economy.

"And the reality is that the city is in danger, if you continue to raise taxes, after the income tax, of losing businesses, of losing population," Msall explains.

Taking a more optimistic view were investment advisors at Mesirow Financial. They said Chicago did not deserve the triple downgrade it got from Moody's. Mesirow thinks the market will place a higher value on the city's bonds and was actually buying Chicago bonds Thursday.

"I think that this is a short term phenomenon," Dominick Mondi of Mesirow's Financial says. "I think that the mayor is doing everything possible to show people the creditworthiness. And actually I think it's a long term great investment and a short term hiccup."

Shortly after lowering the boom on Chicago's credit rating, Moody's raised its outlook for the United States as a whole, from "negative" to "stable." In particular, it said, the federal budget deficit that peaked at 10.1% in 2009 is now likely to be just 2.1% in the fiscal year that starts in late 2014.

Illinois has a $97 billion pension shortfall.

Copyright 2013 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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