Chicago's Both property owners and renters will be feeling the burden of Chicago's credit downgrade. (Walljasper/MEDILL)

Fitch's Downgrade of Chicago's Credit affects all

Most Chicagoans are probably more upset about the city losing the title of “Tallest Building in North America” than they are at the news that Fitch Ratings downgraded the city’s credit rating – if they’re even aware of the latter.

While both are a knock to the city's pride, the downgrade has very real short- and long-term implications for all who call Chicago home.

Fitch, in its report, expressed concern over the city's pension obligations and other recurring liabilities. The ratings company calculated the tax increase Chicago would need to cover its expenses in 2014 and concluded that “the overall impact to an individual payer would be a 35 percent tax increase.”

That proscribed increase does not mean city leaders will actually increase property taxes in the coming year, but it's worth mentioning that owners in Chicago saw a 17 percent tax increase in 2013, when the city's credit rating hadn't yet begun its descent. With the news of Monday's credit downgrade, a tax increase seems inevitable.

But even an anticipated tax hike doesn't translate to immediate impact.

“Taxpayers aren't going to feel it right away,” says Brian Bernardoni, senior director of government affairs and public affairs at the Chicago Association of Realtors.

Property taxes are paid on a one-year delay, so property owners in Chicago just paid their 2012 taxes in August of this year. Any increases brought on by Fitch's recommendations wouldn't hit Chicago checkbooks until late next summer, when tax bills go out again. And when those increases hit property owners, they will also hit Chicagoans who don't have equity in their homes.

“The apartment owner is going to raise rent, potentially, because property taxes are a pass-through,” Bernardoni said.

In addition to rising housing costs, the downgrade could also affect how far a dollar goes in Chicago. Businesses consider a city's economic health when considering relocation or expansion, and potentially unstable tax environments do not translate to welcome signs for new businesses.

John Kmiecik, a real estate agent who has worked in Chicago and the area for more than 35 years, says that even if a business wants to open in the city, banks may take Chicago's downgrade as a reason for pause. “Lenders might be thinking twice or three times or even four times before looking at potential credit availability for commercial properties.”

The strain on businesses isn't reserved for those trying to expand or move to Chicago.

“I think where the impact could likely be felt is with small businesses that don't have a lot of elasticity in the pricing of their wares,” Bernardoni said. Small businesses may not be able to pass on an increased tax burden to consumers, which means eating those costs amid already thin profit margins.

While the implications of Fitch's downgrade don't look good for anyone in Chicago, comparisons to the dire straits of communities such as Detroit or Stockton are premature.

Kmiecik says it's important to look at the potential affects in context. “People are always going to complain about property taxes. You can go into the communities that have somewhat lower property taxes, but I'm not sure that the services, county or municipal, are going to be as good.”

News of Chicago's downgrade will likely fade as the end of the year approaches. As Bernardoni sees it, the credit downgrade won't stay in Chicago's collective memory. “People are ultimately going to be more pissed off about getting a red-light ticket or a speeding ticket.”

But in six months, when tax assessment begin arriving in mailboxes around the city and the cost of renting begins to creep up, residents should think back to Fitch's downgrade and, if nothing else, understand why they are paying more to live in Chicago.

-Christopher Walljasper