The cartoon snake, which Illinois Governor Pat Quinn used to symbolize retiree costs that are strangling the state's finances and undermining its credit rating, is now smothering Chicago. The third-most-populous U.S. city had its general- obligation grade cut by Moody's Investors Service last week to three levels above junk. Excluding bankrupt Detroit and Stockton, California, that's the lowest among the 90 biggest U.S. cities, data compiled by Bloomberg show.

The downgrade raises bond costs for Chicago, which is borrowing about $880 million this week through a sale of general obligations, said Peter Hayes at BlackRock Inc. and John Miller at Nuveen Asset Management. The city can ill afford the extra expense as it faces $590 million in additional pension payments next year, threatening a tax increase and cuts in everything from police to garbage collection.

"Chicago suffers from the delays of pension reform from the state," said Miller, who oversees $90 billion of munis as Nuveen's co-head of fixed income in Chicago. "They could be and should be a way better credit than this — the problem has been clearly identified. It's really a matter of politics."