Chicago gets brighter credit rating outlook from S&P

October 7, 2016 3:09 PM EDT

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CHICAGO (Reuters) - Chicago's recent enactment of a tax to save its biggest pension fund from insolvency won the city a stable outlook for its credit rating from S&P Global Ratings on Friday.

While affirming a BBB-plus rating for Chicago's general obligation bonds, S&P revised the outlook to stable from negative.

Last month, the Chicago City Council approved a tax on water and sewer usage that is projected to raise about $240 million a year once fully phased in over five years. The revenue will help Chicago gradually increase contributions to its municipal retirement system, which is on track to run out of cash within 10 years.

"We view this as a positive step to address the city's underfunded pensions," said S&P analyst Helen Samuelson in a statement.

Credit ratings for the nation's third-largest city have been deteriorating due largely to an unfunded pension liability that stood at $33.8 billion at the end of fiscal 2015 for Chicago's four retirement systems.

Chicago has also authorized a phased-in $543 million property tax for its police and fire retirement systems and a telephone surcharge increase for its laborers' pension fund.

Mayor Rahm Emanuel, who will unveil his fiscal 2017 budget plan next week, said S&P is recognizing the city's economic strength and ongoing work to improve financial management.

"The progress we are making has not occurred without tough choices, but this shows hard work pays off – all four pension funds are on a path to solvency and our budget gap is the smallest it has been in nearly a decade," he said in a statement.

The city's action to patch up its pensions led to an outlook revision to stable from negative in August from Fitch Ratings, which rates Chicago's $9.2 billion of GO bonds BBB-minus. Moody's Investors Service still has a negative outlook on its Ba1 junk rating for Chicago.

(Reporting by Karen Pierog; Editing by Matthew Lewis)

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