CHICAGO – Chicago's unfunded pension obligations could continue to swell for at least the next decade, Moody's Investors Service believes.
And that's the good news offered in a new Moody's report, under a best-case scenario with public safety pension funds benefitting from a record property tax hike and assuming the city prevails on pending political and legal challenges.
The special report released Monday incorporates the infusion of new revenue from the City Council's recent adoption of Mayor Rahm Emanuel's record property tax hike that will bring in $543 million annually for public safety pensions after a four-year phase in.
The city's general obligation ratings have plummeted over its massive $20 billion tab of unfunded liabilities and the pressures posed by rising costs. Moody's, which is no longer asked for new deal ratings, stripped the city of its investment grade rating in May assigning it a Ba1 with a negative outlook.
"The analysis indicates that, despite significantly increasing its contributions to its pension plans, Chicago's unfunded pension liabilities could grow, at a minimum, for another ten years," writes Moody's analyst Matthew Butler. Moody's has called the property tax hike a positive step. "Chicago's statutory pension contributions will remain insufficient to arrest growth in unfunded pension liabilities for many years under each scenario," the comment said.
Growth in the unfunded liabilities and pension costs will continue "for some time regardless of the outcomes of the state's and court's decisions," Moody's wrote.
The report delves into city pension funding scenarios based on the outcomes of a pending legal challenge to a legislative overhaul of the city's two other pension funds and pending state legislation that would ease skyrocketing payments owed for the city's police and firefighter funds. The report also offers an assessment of each scenario's impact on the city's credit profile.
The property tax hike is tied to the city's proposed re-amortization of the schedule to implement increases in public safety pension contributions under a 2010 state mandate to fund them on an actuarial basis.
State lawmakers have passed Emanuel's re-amortization proposal, which would delay the city's shift to an actuarially required contribution payment, but the legislation's fate is uncertain given Gov. Bruce Rauner's ongoing feud with lawmakers over a fiscal 2016 budget. If the changes are not enacted, the city needs to come up with an additional $220 million next year.
On the legal front, Chicago will argue before the Illinois Supreme Court next week that reforms approved for its municipal and laborers' funds in Public Act 98-0641 preserve and protect the funds' solvency. A lower court judge in July voided the reforms, finding benefit cuts violated the state constitution.
Under one scenario, the public safety legislation is adopted and the high court sides with the city on the two non-public safety funds. Statutory pension contributions increase significantly, but the amounts budgeted and planned going forward enable unfunded liabilities to grow for another 20 years, Moody's said.
"We would view an Illinois Supreme Court reinstatement of PA 98-0641 as a credit positive development," Moody's wrote. "However, the expectation of future growth in unfunded liabilities and the associated credit risk, despite improved funding practices adopted in Chicago's budget, would temper the positive credit implications."
A second scenario assumes that the public safety legislation is not adopted and the high court restores the pension reform legislation. In that case, statutory pension contributions are, on net, materially higher than budgeted, and unfunded liabilities continue to grow, but only for another 10 years, as the larger payments moderate the projected growth trajectory.
"This scenario is the most credit positive over the long term. Although it would require larger pension contributions than currently budgeted, the higher payments would achieve the slowest and least extensive growth in unfunded liabilities among the four scenarios," Butler wrote.
Under a third scenario in which the city loses on both fronts, the city pension funds would experience rapid unfunded liability growth and face higher public safety contributions and long term funding challenges raising "the possibility of substantial cost growth for the city over the next decade," Moody's wrote.
Under a fourth scenario, the legislation on the public safety funds is adopted and the court rejects the municipal and laborers fund reforms. The fourth poses the greatest risk to growth of the unfunded liabilities tab.
On the latter two scenarios, Butler writes: "This would exert additional negative credit pressure on Chicago's credit quality because it would likely remove all flexibility to reduce unfunded liabilities through benefit reform and raise the probability of plan insolvency" for the municipal and laborers' funds.
In a response to the report, the Emanuel administration did not take issue with any findings while reiterating its efforts to tackle its pension strains.
"Mayor Emanuel is committed to ensuring that city employees and retirees have a pension to turn to. Both SB777 and SB1922 were passed after successful discussions with the impacted unions, securing the retirements of our employees and retirees without burdening taxpayers with unsustainable pension contributions," said the statement forwarded by finance spokeswoman Molly Poppe. "These pension reform plans are sensible and represent a shared path forward in addressing the pension challenges that threaten Chicago's future, while reducing the impact on taxpayers, and as Moody's accurately states, the passage of SB777 and upholding of SB1922 are credit positives for the city."
