City of Chicago's Credit Rating Downgraded

Fitch Ratings and Kroll Bond Rating Agency (KBRA) have both downgraded Chicago's general obligation bonds to BBB+ from A-, maintaining a negative outlook. The downgrades were issued just before the city plans to sell approximately $502 million in new bonds. Fitch cited operating deficits, a high dependence on non-structural budget solutions, and persistent disagreements between the mayor and city council as key reasons for the decision. A major point of contention is the city's $16.6 billion budget for 2026. A coalition on the City Council passed the budget after scrapping Mayor Brandon Johnson's proposed corporate head tax. Instead, the approved budget relies on "untested and non-recurring" revenue streams, including the sale of uncollected city debts and fines, which the mayor's office had previously called "morally bankrupt." To avoid a city government shutdown, Mayor Johnson allowed the budget to pass without his signature, a move that averted an immediate crisis but did not resolve the underlying financial disagreements. This political gridlock has impeded the development of a credible plan to restore long-term structural balance to the city's finances. The rating agencies specifically warned about rising fixed costs, particularly for pensions. KBRA noted that pressures from the city's high and rising fixed cost burden limit financial flexibility and could jeopardize the city's ability to continue making advanced pension contributions, a key element in stabilizing its significant net pension liability. This isn't just a paper shuffle; the downgrade directly impacts the city's borrowing costs. Higher interest rates on bonds for capital projects could eventually translate to increased pressure on property taxes or cuts to city services to cover the added expense. The downgrade also extended to the Sales Tax Securitization Corporation (STSC) bonds, which were lowered from a top-tier AAA rating to AA+. This is significant because the city has increasingly relied on this corporation, created by former Mayor Rahm Emanuel, to borrow at lower rates by separating sales tax revenue from the general fund. Analysts view the downgrades as a "wake-up call" that political infighting is worsening Chicago's long-standing structural deficit. S&P Global Ratings, which also holds a negative outlook, has indicated there's at least a one-in-three chance of another downgrade within the next two years, with the fiscal 2027 budget negotiations being the next major test of the city's financial direction.