Fitch downgrades rating on Chicago bonds

By Kathy Bergen
Posted Aug. 5, 2010 at 3:10 p.m.

Fitch Ratings reduced its rating on city bonds Thursday, citing Chicago’s rapid use of one-time reserves to balance past operating budgets, its underfunding of pension obligations and its steep declines in tax revenue.

Fitch cut its rating on $6.8 billion in outstanding general obligation bonds by one notch, from AA+ to AA, which is the third rung from the top (and still considered high quality.) But the agency also issued a negative outlook, and warned that further downgrades were possible if the city doesn’t balance its operating budget and address its retiree benefit costs — or if the local economy gets worse.

“The downgrade reflects the city’s weakened financial flexibility,” Fitch Ratings stated in its report. It noted the city faces a $654.7 million budget gap for the fiscal year that began July 1.

The agency also assigned the AA rating to several major city bond issues planned for the next few weeks.
City officials anticipated the possibility of a downgrade, and they don’t think it will significantly affect long-term borrowing costs, said Gene Saffold, the city’s chief financial officer.

“Utilizing one-time resources like reserves … is not something Mayor [Richard] Daley wanted to do, but he was forced to choose that option in order to combat the catastrophic effects of the national recession on our city budget and Chicago residents,” Saffold said in a statement. “The city had already taken significant steps to reduce spending and the remaining alternatives were far worse — substantially raising taxes, drastically cutting services, or both.”

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