Moody's Downgrades Chicago Credit Rating To 'Junk' Bond Status

CHICAGO (CBS) --  Citing the city's underfunded pension crisis, Moody's Investors Service downgraded Chicago's debt to junk bond status on Tuesday.

The Ba1 rating means that Chicago's $8.1 billion in debt carries a substantial credit risk. That credit rating is also just a few levels above bonds that are in default.

"The Ba1 rating on Chicago's  debt incorporates expected growth in the city's highly elevated unfunded pension liabilities," Moody's said.

The service cited the state Supreme Court's recent decision to toss out the state's pension reform bill as unconstitutional, along with concerns that the city will be able to meet its pension obligations in the future.

"We believe that the city's options for curbing growth in its own unfunded pension liabilities have narrowed considerably. Whether or not the current statutes that govern Chicago's pension plans stand, we expect the costs of servicing Chicago's unfunded liabilities will grow, placing significant strain on the city's financial operations absent commensurate growth in revenue and/or reductions in other expenditures. "

The move is not only financially embarrassing for the city, it will also increase the costs for future borrowing.

Moody's believes Chicago's credit challenges will continue, both in the near term and in the long term.

"The negative outlook also reflects our expectation that Chicago's credit quality will weaken as unfunded liabilities of the Municipal, Laborer, Police, and Fire pension plans grow and exert increased pressure on the city's operating budget. "

Mayor Rahm Emanuel criticized the downgrade.

"While Chicago's financial crisis is very real and at our doorsteps, today's irresponsible decision by Moody's to downgrade the City's credit by two steps goes far beyond that reality," he said. "Their decision was driven solely by the overturning of a state pension bill that did not include Chicago's pension reform, yet they did not downgrade the State of Illinois."

Given the city downgrade, experts expect Moody's to issue a similar one or two-level downgrade of Chicago Public Schools credit rating.