Chicago Watch: Bond Downgrades and Secret Borrowing
When the debt is "structural", how do you think it will end?
Before I get to news coverage, let’s get the info straight from the horse’s mouth, shall we?
City of Chicago Office of Financial Analysis, Bond Analysis, most recent graph of bond ratings:
For those unfamiliar with the ratings shown above, the Baa3/BBB horizontal line is the lowest level considered “investment grade”.
Rather than get into the ins-and-outs of what makes something “investment grade” versus “below investment grade” (Ba1/BB+ and below — and “below investment grade” has been known colloquially as “junk bonds” or less pejoratively as “high yield bonds”), let us consider the consequences of being rated “below investment grade”. The lower the credit rating, the higher the interest rate one’s bonds sell at, so it’s more expensive to borrow money. That’s expected.
But also, some big borrowers (aka institutional investors) have limits or requirements on below investment grade holdings. So they may have to sell some of their holdings, further straining the ability of such a borrower to issue bonds. It can get even more complicated than that. I’ll leave it there.
In any case, the recent downgrade didn’t come from Moody’s, which has the lowest rating for Chicago bonds, but from Kroll (KBRA) and Fitch, which had the highest ratings. I will note that Kroll, Fitch, and S&P all have negative outlooks for their current ratings, and Moody’s has a stable outlook from their current rating. This gives an indication for future movement.
Structural Budget Imbalance
The Chicago Office of Financial Analysis put out a report in response to the two downgrades: Ratings Change City of Chicago General Obligation Bonds, Sales Tax Securitization Corporation, February 2026
The report is only 7 pages [including the title page], so let me pull out some key items.
Despite differences in emphasis, both agencies converge on a central concern: persistent structural imbalance and growing fixed costs absent recurring revenue solutions. While Fitch emphasizes revenue reliability and governance dynamics, KBRA places comparatively greater weight on liquidity and pension-related fixed cost pressures; however, both agencies ultimately identify structural imbalance as the central credit challenge.
That emphasis was in the report itself.
What makes it structural as opposed to temporary is that there are ongoing problems, of which pensions are a huge part.
I will get to the debt use issue shortly, but the continual need to issue short-term debt to cover operational costs is not a great look. Whether economic times are good or bad…. that indicates structural issues in the budget.
Let’s get to the two different parts:
Fitch
I’ve added emphasis.
Fitch offers several factors that could lead to further downgrades for the City. Downgrade risks include “management ineffectiveness” (i.e., late budget adoption, non-credible revenue forecasting, and inaction in the face of mid-year gaps), reliance on nonstructural fiscal measures, failure to fund full pension contributions, and weakening available reserves to less than 7.5% of general fund spending. For the City to earn an upgrade, Fitch will look for reduced budget gaps while preserving reserve funds, improved pension funding contribution practices, and an approximate “20% reduction in the City’s long-term liability burden metrics.”
Oh, good luck with that.
Fitch also noted various factors outside of FY 2026 budget related considerations that contribute to the overall assessment of the City’s credit rating. Fitch assigned the weakest rating for the City’s population trend -- though also notes the City’s population and economic diversity is strong. Growth prospects for revenue are also largely positive, with Fitch expecting the "strength of Chicago's economy to support revenue growth that exceeds historical inflation over the long run.” The City’s long-term liability burden is also assigned the weakest rating, particularly related to debt and pension liabilities. Fitch notes overlap with other governments with high liabilities, namely Chicago Public Schools, also impacts the City’s liability burden assessment. While the advance pension payment is seen as a positive action for the City, the lack of prior year budget surplus – typically used to make the advance contribution – may “jeopardize” the payment in future years.
Yeah, they’re not really going to be able to make those pension payments.
Kroll (KBRA)
The advance FY 2026 pension payment is a credit positive for KBRA – however, use of the Corporate Fund balance to make the contribution is a concern in the short-term. KBRA also points to passage of State legislation (Public Act 104-0065) expanding pension benefits for police officers and firefighters placing further strain on the City’s mandated payments beginning in FY 2027.
Yup, they mentioned the police & fire pension sweeteners.
Just a few pieces I did on those sweeteners last year:
And a last remark from the Office of Financial Analysis:
KBRA’s report marks the first explicit credit rating report that includes the impact of State legislation (Public Act 104-0065) expanding pension benefits for police officers and firefighters. Enacted in August 2025, the expansion is estimated to add $11 billion to Chicago’s pension liability and to increase City contributions by approximately $6.5 billion by 2055. With the City’s high pension liabilities cited by both downgrade reports, further strain on pension funding may pose additional risks to long-term financial stability without equally expanded revenue to support the contributions.
Okay, let’s jump to coverage and commentary.
News Items: Downgrades and Additional Borrowing
26 Feb 2026, CBS Chicago: Chicago credit rating downgraded over operating deficits
Chicago’s credit rating is being downgraded in the wake of last year’s budget battle between Mayor Brandon Johnson and the City Council.
Fitch Ratings has given Chicago a BBB+ overall, while downgrading sales tax securitization from AAA to AA+.
Fitch said the rating cut reflects the city’s operating deficits since 2023.
In a statement, Fitch said the downgrade is due to disagreements between the Johnson administration and the City Council, adding that the disagreements have “impeded decision timeliness and the development of a credible and comprehensive plan to restore structural balance.”
In response to the city’s credit rating downgrade, Civic Federation President Joe Ferguson released the following statement: “The Civic Federation takes no pleasure in yesterday’s news that two rating agencies have downgraded the City’s credit rating. A credit downgrade is not just symbolic; it indicates real financial consequences and long-term ramifications for not just the City but its residents.”
26 Feb 2026, Civic Federation: Statement from the Civic Federation on KBRA and Fitch downgrades
27 Feb 2026, Chicago Tribune/Yahoo Finance: Editorial: Mayor Brandon Johnson is leaving his successors with a financial ash heap. It’s worse than we thought.
Standard & Poor’s downgraded Chicago a little over a year ago and continues to give Chicago a negative outlook. This most recent Kroll downgrade is its second in two years.
Wednesday’s downgrades come as the city prepares to solicit bond investors next month for close to $500 million to cover back pay owed to firefighters due to a lengthy contract negotiation and hundreds of millions in anticipated costs to settle lawsuits, most of which pertain to alleged police misconduct. The downgrades will make the debt more expensive for the city, as investors will be expected to demand higher yields in response to the higher risk tied to Chicago’s precarious financial condition.
But here’s the real shocker: The city is structuring this debt so it doesn’t have to make payments for the next three-plus years, extending the time frame for paying off the bonds and making the entire enterprise considerably more expensive than was envisioned during the fraught budget discussions late last year.
1 Mar 2026, Austin Berg: Chicago hit with 2 credit downgrades as Johnson secretly floats new borrowing plan [I added emphasis]
The Chicago Tribune editorial board revealed Johnson’s administration has been furtively floating a $500 million bond on which the city would make no payments at all for three years.
Not interest-only payments. Literally $0 in payments on the debt.
For the remainder of Johnson’s term, and beyond.
….
In short: Johnson gets to spend the money now. But the next mayor—and the next generation of Chicagoans—are stuck with the tab.
Johnson’s bait-and-switch
This backloaded payment structure is not what Johnson’s team sold to City Council members last year.
Back in November, Chicago CFO Jill Jaworski briefed the Council on a borrowing package that included new debt to cover, among other items, retroactive raises for firefighters.
Ald. Bill Conway wisely kept receipts on that briefing. Borrowing for this kind of operating expense in itself is a terrible financial practice. But as Conway noted, at least the payment schedule was relatively straightforward.
Austin Berg links to tweets by Ald. Bill Conway, and I’ll snip a couple with my own remarks:
Unfunded pension liabilities are already unpaid operating costs that are amassing interest. They are benefits for services rendered in the past, often the long past, and Chicago is notorious for not fully paying what was owed and for letting their pension debt accrue further and further interest.
Just pulling the fire pensions:
With the pension sweeteners mentioned above, that funded ratio is going to plummet in future valuations. Kroll was correct to point out the problem there.
Chicago hasn’t been doing much to fix its structural fiscal problems. Brandon Johnson was never going to be the person to do it, and when Pritzker signed the pension sweetener, making the problem worse, obviously he wasn’t going to be any help.
I suppose they wanted to “heighten the contradictions” until they collapse the Chicago and Illinois finances… and then… bailout?
Unfortunately, there will be nobody to bail them out. Whups. Should have planned better.
Austin Berg has ideas:
Beyond the short term, Chicago governance is riddled with shortcomings that make the city vulnerable to bad deals like this, including:
Lacking an independently elected CFO with real authority, as is common in other big cities.
Lacking a requirement for voters to approve new debt, as is common in other big cities.
Lacking a fully resourced budget office within the City Council.
Lacking an independently elected city attorney. (Today, if the Council wanted to sue the mayor’s office, they would be required to use corporation counsel…which reports to the mayor’s office.)
Many of these safeguards are typically found in a city charter. But Chicago is the only big city without one.
I wonder how these elements are incorporated in the credit rating process.
I see “Intergovernmental tension” as a category in the table above, but I suppose if you’re not really independent, you can’t say “crappy governance structure” as one of the characteristics in a downgrade.
Now look at Portland, Oregon. Commercial real estate has cratered. Losing population to Idaho. Taxes are high, so workers are moving across the state line to Washington (but Oregon has no sales tax). Plus major homeless population with open-air drug use, forcing retailers to shutter stores. What it will take for the raters to do a downgrade?