An independent credit-rating agency downgraded the city’s bond rating Thursday, citing the Richard M. Daley administration’s habit of drawing on reserve funds for general operating expenses and underpaying its pension funds since well before the recession kicked in.
In announcing Thursday afternoon that it was lowering the city’s bond rating from AA+ to AA, the Fitch Ratings agency also pointed out the city lacks a plan for developing new revenue and faces a rising tide of fixed operating costs.
For two years Daley has been blaming the poor economy for the city’s budget problems. In his annual State of the City speech yesterday, he said the city might have to cut back on services to grapple with a budget deficit in excess of $650 million.
But the Fitch report notes that the city government has been living beyond its means for years.
“While there had been sound economic growth in years prior to 2008, there were still sizable fund balance drawdowns in both 2006 and 2007,” the rating report says.
“Fitch believes it will be difficult for the city to achieve balanced operations in the near future given its increasing fixed expenditures and limited revenue raising measures. The inability of the city to enact working structural solutions to achieve balanced operation will result in negative future rating action.”
The report praises the administration for “strong steps to reduce spending,” such as forcing city workers to take unpaid furlough days, but says the city’s ability to raise revenue is hampered by an ailing local economy, particularly in the housing market. Most of the city’s general operating revenues come from property taxes.
The report also raises questions about whether the city is providing adequate funding for pension payments owed to current and retired workers. The city’s four pension funds are currently only 43 percent funded, down from 83 percent a decade ago.
“Fitch believes meaningful and timely measures to address the large and rapidly increasing liability, while practically and politically difficult, will be important to maintaining the current rating level,” the report states. Indeed, although a mayoral panel recommended cutting pension benefits earlier this year, the administration has yet to act on them.
A call to the city’s budget and finance office wasn’t immediately returned, but in the past administration officials have emphasized the importance of maintaining the city’s credit rating because high ratings can make borrowing less expensive, thus lowering the cost of running the government.
One of the city’s top arguments in favor of privatizing the parking meters was that the upfront $1.15 billion payment would add to the city’s financial reserves and solidify the city’s credit. But now most of that money has been spent.