CHICAGO – The risky underpinnings of Chicago's efforts to solve its $20 billion pension mess take center stage this week.
The Illinois Supreme Court on Thursday will release its opinion deciding the fate of the city's overhaul of its laborers' and municipal employees' pension funds.
Word came of the impending ruling Monday, shortly after the city said it had made a $220 million draw from its $900 million short-term borrowing program to meet an obligation to its police and firefighter funds.
The council adopted Mayor Rahm Emanuel's plan to phase in a record $543 annual million property tax hike last fall to cover rising police and firefighter contributions, but the plan to phase in the tax increase assumed the state government would approve a revised amortization payment schedule to slow the shift to an actuarially required contribution level mandated by a 2010 law, which would trim the $550 million payment spike in 2016 by $220 million.
The General Assembly approved the city's plan to soften the blow for taxpayers, but hasn't sent it to Gov. Bruce Rauner's desk. The Republican governor has threatened a veto absent an agreement with Democrats on a fiscal 2016 budget and structural pension reforms.
"Pensions are the crux of Chicago's long term health," said Matt Fabian, partner at Municipal Market Analytics. "Almost no one expected that particular budget gambit to pay off, so it's not a surprise. It also shows how the city's go-to strategy is more borrowing, which is not encouraging given the other risks in the city's budget."
With $20 billion of unfunded obligations, Chicago's pension systems are just 34% funded.
Investors and analysts are watching closely because any pension setback could further dent the city's tarnished credit and impact the trading value of its debt. The city also stands to lose ground it gained in trimming yield penalties. The city's 10-year maturity in a deal priced earlier this year landed at about a 250 basis point spread to the top-rated Municipal Market Data benchmark compared to spreads that neared 300 last year.
The city carries a junk-level rating of Ba1 from Moody's, with a negative outlook; BBB-plus ratings from both Fitch Ratings and Standard & Poor's with both assigning negative outlooks; and is rated A-minus with a negative outlook by Kroll Bond Rating Agency.
Moody's affirmed the city's ratings last week warning that downgrades could occur if "faster than anticipated growth in Chicago's debt and pension leverage" occurs "that requires a greater share of city revenue to service long-term obligations."
A "failure of the city to develop and implement an alternate plan to fund non-public safety pensions should the Illinois Supreme Court rule the city's 2014 reform statute unconstitutional" also could drive a downgrade.
Credit Lines
Finance officials said the short term credit line was used to meet a March 1 deadline on a deposit with the city treasurer to cover the police and firefighter contribution this year should the re-amortization fall through. Chicago's chief financial officer, Carole Brown, disclosed the plan in a letter to council members.
Finance officials portrayed the move as short-term cash flow management issue. "We will not be issuing long-term debt to make this pension contribution. The city continues to believe the governor will support Senate Bill 777 as it protects taxpayers and provides a responsible funding plan to secure police and fire pensions," said finance department spokeswoman Molly Poppe.
The city pays an interest rate of 3% on the line. The credit line would be paid off if the amortization bill is signed, formally reducing the city's required payment.
City budget officials told council members last year that cuts and/or other tax hikes would be needed if the legislation was not eventually adopted.
Use of the short-term borrowing program brings to $425 million the total outstanding. The city has $900 million in borrowing capacity from various bank provided lines.
The city revamped its short-term borrowing program this year after downgrades prompted defaults on credit terms that could have allowed banks providing the lines to demand the repayment of about $800 million then outstanding. Under council authority, the city is allowed to have as much as $1 billion outstanding. The city moved much of the balance to its long-term debt load in a bond sale last year and then established new lines.
"This short-term liquidity program allows us to meet any unforeseen financial obligations," finance officials said in an investor presentation earlier this year.
The city has come under fire for covering the cost of operating expenses like judgments, settlements and retroactive pay increases by tapping its short-term program and then moving the debt into a long-term structure. Emanuel last year vowed to end those practices.
The Court
Justices will decide whether the reform package for the laborers' and municipal employees' funds proposed by the city, passed by the General Assembly, and signed into law by former Gov. Pat Quinn in 2014 violates state constitutional protections of pension benefits.
Unions challenged the constitutionality of the reforms and a Cook County Circuit Court judge overturned the legislation in July, citing the state Supreme Court's May 2015 opinion voiding state pension reforms. The city and union attorneys argued their sides before the justices in November.
Many in the municipal market believe the court will toss out the two funds' overhauls based on the strict interpretation justices offered of the constitution's pension clause when they rejected the state's 2013 pension reform package.
If the court upholds the lower court decision throwing out the reforms, Chicago would actually get near-term budget relief because the plan called for the city to make $100 million in additional contributions in 2016. In the long run, the city would face a more burdensome strain because the two funds would revert to the previous funding scheme under which they are headed for insolvency in the next decade absent a new infusion of funding.
Under the legislation, the city's contributions to the two funds rise from $177 million in 2014 to a projected $650 million in 2021. The plan puts the funds on course to achieving a 90% funded ratio in 40 years. The reform package cut benefits while raising city and employee contributions.
The city argues that the overhaul preserves the pension funds rather than damages them, and that union acquiescence at the time renders the changes legal. The fund members say the state constitution's pension clause trumps those arguments because it gives contractual rights to membership in the funds and protects benefits from being diminished or impaired.
The overhaul took effect Jan. 1. The case is Jones, et al. v. Municipal Employees' Annuity and Benefit Fund of Chicago, et al.
