Reported debt deal, credit downgrades may add to Chicago budget woes

By Jim Talamonti | The Center Square
The Center Square

(The Center Square) – Chicago taxpayers may face higher costs if the city follows through with a reported bond deal.

The Chicago Tribune Editorial Board reported last week that Mayor Brandon Johnson is structuring the city’s debt with a $500 million deal to cover back pay owed to firefighters and anticipated lawsuit costs.

“If they signed a collective bargaining agreement and pay is retroactive and they haven’t paid it yet, that’s a liability, as well as the legal settlements,” DePaul University economics professor Thomas Mondschean told The Center Square.

Mondschean said these are real costs that the city owes.

“Those are expenditures that happen, and you pay for it with higher taxes or reallocations from other parts of the budget. The city administration has decided to pay for this by borrowing the money,” Mondschean said.

Fitch Ratings and KBRA both downgraded Chicago’s general obligations bond rating to BBB+ last week.

Mondschean said the downgrades will increase the interest rate on money the city borrows at for new issues.

“It doesn’t affect the debt that is already outstanding until they decide to refinance it. But going forward, a lower bond rating means you have to pay a higher interest rate on whatever you’re borrowing when you issue a bond,” Mondschean said.

Fitch cited Chicago’s consecutive operating deficits since 2023 and high dependence on non-structural solutions and assumptions.

KBRA cited a deteriorating fund balance, narrowing liquidity, and exceptionally high and rising fixed cost burdens, including the Illinois General Assembly’s passage of Tier II pension adjustments last year.

Mondschean said there would be higher interest expense in the city budget because of additional debt and because the interest rate on that debt is higher.