The coronavirus, or COVID-19, is going to strain America’s biggest cities financially, and Chicago is likely to feel the most pain.
S&P Global Ratings looked at 10 of the biggest cities in America — Boston, Chicago, Houston, Los Angeles, Miami, New York, Philadelphia, Phoenix, San Francisco, Seattle — and weighed various factors like each city’s cash balance, their reliance on property, sales, and income taxes, intergovernmental revenues, and pension obligations, among others.
The authors found that while all 10 cities “enjoy proactive management teams,” COVID-19 will put immense pressure on them to “respond quickly and adequately.”
One of the cities facing immense pressure is Chicago.
“Chicago's … uphill climb has gotten harder with the addition of COVID-19 and recession pressures on a city already struggling to regain structural balance,” the authors stated.
Chicago has the lowest rating among all of the 10 major cities in the U.S. that S&P looked at, at BBB+, which denotes that the city’s bonds are still investment grade.
Effect on pension system ‘could range from benign to catastrophic’
Chicago is walking a tightrope trying to balance all of its financial commitments.
For one, it has a huge pension obligation. The city participates in four pension plans “with a combined funded ratio of only 22.9% and a combined net pension liability of $30.1 billion as of Dec. 31, 2018,” which are sensitive to the markets, the authors noted. Hence, market volatility “could have an outsized effect on the funds,” they warned.
And Chicago will incur further expenses from COVID-19 and related costs.
The city will likely be able to cope in the short term, but in the long term, “the damage the ensuing recession will inflict on the city's pension plans could range from benign to catastrophic,” the authors stated.
Additionally, “economically sensitive revenues” like transport tax, shared-state income tax, and other revenue sources could also be at risk — and that’s significant, as that money previously made up 35% of Chicago’s key operating revenues in fiscal 2018.
Ultimately, the level of pain will depend on the city’s management of the issues.
Chicago also least prepared for a recession
S&P is not the only one worried about Chicago.
In a separate report by Moody’s Investor Service published last year, the city was also singled out as one of the least prepared for a recession.
Using four main factors to determine how prepared a city was for a recession — fiscal volatility, reserve coverage, financial flexibility, and pension risk — the researchers found that most of the largest 25 U.S. cities are prepared to handle a recession like the previous one, but the two cities of Chicago and Detroit were not.
According to Moody’s analysis of the cities’ bond ratings, which is a measure of the quality of the creditworthiness of corporate or government-grade bonds, an “investment grade” rating refers to bonds that present a relatively low risk of default: “Aaa” and “Aa1” denote the highest credit quality while “Ba1,” “Ba2,” “Ba3” and others denote medium credit quality and non-investment grade.
Moody’s rated Chicago as Ba1 and Detroit as Ba3 — meaning that both fall under the non-investment grade category.
Other major U.S. cities also vulnerable
Not all cities are going to escape the pandemic unscathed, the authors noted.
“American cities that entered the recession with weak liquidity and reserves or with a high amount of economically sensitive revenues will be particularly vulnerable to the looming pressures,” they explained.
For instance, the sharp drop in crude oil prices could “add to Houston’s challenges,” they noted, but it also depends on how long the environment persists.
The situation in Phoenix, on the other hand, is unclear, and the “economic and financial challenges remains to be seen,” they wrote.
And for Seattle, one of the first cities to be affected by the coronavirus, the virus will “have a material negative effect on the city’s revenues in 2020,” the authors noted.
However, the authors noted, the Emerald City should be able to rebound.
Aarthi is a reporter for Yahoo Finance. Follow her on Twitter @aarthiswami.