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Chicago's Credit Rating Is Downgraded

ARUN RATH, HOST:

Dear Chicago, because of your $20 billion pension debt, your credit worthiness is being downgraded. You have bad credit. That's the message that three major credit rating agencies sent to Chicago this past week. Moody's Investors Service dropped the city down two notches, to junk status. From member station WBEZ in Chicago, Susie An reports.

SUSIE AN, BYLINE: Moody's is knocking Chicago down to junk status, mainly because it's having trouble properly funding its workers' retirement benefits. Mayor Rahm Emanuel says the downgrade is irresponsible and plays politics with the city's financial future.

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MAYOR RAHM EMANUEL: I'm committed to making sure that people have a pension that they can retire on in a way that is - doesn't overly burden taxpayers and our ability to grow our economy as we do that.

AN: To be sure, it's rare for a city to be demoted to junk bond status.

YVETTE SHIELDS: With the exception of Detroit, Chicago is really alone now among major cities carrying the junk bond rating from at least Moody's.

AN: Yvette Shields is the Midwest bureau chief editor for Bond Buyer Newspaper.

SHIELDS: Pittsburgh, in 2004, was rated at the same level, Ba1. And other cities have fallen in the speculative grade, like Cleveland in 1978. And, of course, the big one was New York City in 1975.

AN: Shields says it took New York City about six years to be able to borrow again on its own. Chicago's situation isn't that bad.

SHIELDS: The city is nowhere near a place where it would be locked out of the market or anywhere near where it should be considered that it's close to default. Even the most distressed borrowers, they can find investors. The question is, at what cost?

AN: That cost in the short term is fewer lenders. Shawn O'Leary is senior research analyst with Nuveen Asset Management.

SHAWN O'LEARY: That also means higher yields, higher interest rates, higher taxes to service that debt.

AN: Chicago's junk status could push lenders to demand up to $2.2 billion in immediate principal and interest payments. And that'll fall on the backs of city residents. For example, a homeowner with a $400,000 house currently pays just under $7,000 in property taxes. O'Leary says if the city of Chicago wants to fully service its pension funds, property taxes will need a major bump.

O'LEARY: It would go up by about almost $3,400 to just over $10,000, which is about a 49 percent increase.

AN: A 49 percent increase. O'Leary says it's more likely that lawmakers would opt for a combination of tax hikes, increased fees and cuts in city services, which still won't be easy to stomach.

O'LEARY: What does that do to the tax base of Chicago? What does that due to population and demographic shifts? What does that do to business investment? And that's certainly a risk because this level of tax increase is no minor deal. And it will have implications for the economy.

AN: But O'Leary says Chicago is not the next Detroit, a comparison that's often made when any major city is in financial distress. For one, Detroit was largely a single industry town, car manufacturing. Chicago's economy is much more diverse.

O'LEARY: You're hard-pressed to identify what the single industry is in Chicago. It's a very solid mix of commercial and industrial and finance and medical and education.

AN: O'Leary says it won't be easy, but Chicago has options to climb back up. And investors will see it as less of a risk. For NPR News, I'm Susie An in Chicago. Transcript provided by NPR, Copyright NPR.