New reports from rating agencies shine unwelcome light on Chicago's and Illinois’ “outlier” status on pension debts and the growing risks of heat-related climate change on some local Illinois governments.
Chicago faces the most burdensome pension tab among large cities with $30 billion of net pension liabilities, according to the S&P Global Ratings report “Fifteen Largest U.S. City Pensions See Modest Gains in 2018, but Recession Risk and Rising OPEB Cost Challenges Persist,” published Monday.
Illinois carries the distinction of carrying the highest net pension liabilities based on Moody’s Investors Service figures that are adjusted based on actuarial assumptions they apply, according to a report published last week, “U.S. State Adjusted Net Pension Liabilities in FY 2018 Show Declines Due to Strong Investment Returns, With New Retiree Healthcare Liabilities Varying Widely.”
And local governments in western Illinois are greater risk than many other regions for climate change-heat related fiscal strains, according to a Moody’s report “U.S. Local Governments, Particularly in Midwest and Southeast, Face Growing Heat Stress,” published Tuesday.
The city and state’s pension pressures weigh heavily on their rating profiles and borrowing rates and are no surprise to market participants who follow the two credits, but putting them in a national context highlights their status.
Chicago
“Chicago has been a consistent outlier in our survey over the past three years,” S&P wrote. “Its pensions are the most poorly funded of the largest U.S. cities, such that they have contributed to the largest structural budget deficit in the city's recent history.”
Chicago’s funded ratios declined to about 23% last year from 26% and the net pension liability tab rose to $30 billion, representing $11,171 per capita, from $28 billion, $10,092 per capita. Chicago lost ground because contributions couldn’t cover interest on its liability.
Mayor Lori Lightfoot’s administration is grappling with a budget deficit due in part to a spike in contributions for two of its four funds as they reach the required date to be funded on an actuarial basis. S&P rates Chicago’s general obligation debt BBB-plus with a stable outlook.
“With fixed costs at 45% of expenditures and rising, we expect it will continue to face cost pressures that compete with other discretionary spending and absorb a greater share of its total revenue capacity,” S&P wrote.
The fixed-cost figure includes pensions, other-post employment liabilities, and bonded debt. Houston follows at just under 40% and then Dallas at 30%. Nearby Indianapolis, in contrast, has the best funded pensions of the top 25 cities with pension and OPEB contributions accounting for just over 3% of total spending.
Chicago's pension, OPEB, and debt service spending is high among the 15 largest U.S. cities, exceeding 25% of governmental expenditures on average in the most recent fiscal year and that will continue due to growing retirements and rising medical costs and many are at risk as recession fears loom.
“We expect higher fixed costs to increase pressure on other priority services such as public safety and public works, absent tax base growth, tax rate hikes, or new revenue streams, and indeed we are already observing the effects of this trend in some of the cities facing the greatest cost pressures,” S&P wrote.
Illinois
Total adjusted net pension liabilities for all states based on Moody’s formula dropped by 3.6% to $1.56 trillion in fiscal 2018 due mostly to strong investment returns. The median state level lands at $12.2 billion or 91% of revenues.
Illinois gets the black mark for having the highest ANPL of $240.8 billion, representing 505% of its revenues. The state’s unfunded liabilities, reported on an actuarial basis before Moody’s applies its methodology, was nearly $134 billion.
Kentucky followed with a $45.9 billion ANLP, 308.7% of revenues; then Connecticut with $62.1 billion, 285.8% of revenues; New Jersey with $113.8 billion, 274.9% of revenue, and Maryland with $59.3 billion, 236.5% of revenue. The five with the lowest adjusted liability were North Carolina, Tennessee, North Dakota, Tennessee, and New York, according to the Moody’s report.
Illinois ranks among the states with substantial OPEB burdens but it didn’t make the top five. New Jersey beats it with a highest adjusted level that represents 13.8% of state gross domestic product. Hawaii, Delaware, Connecticut and Vermont round out the top five followed by Illinois.
Investment returns remained favorable in fiscal 2018 averaging about 8.8% which is above many funds’ targeted ratios which along with rising interest rates could reduce 2019 liabilities. “However, lower returns and declining interest rates in fiscal 2019 will lead to growing liabilities again in fiscal 2020 reporting,” Moody’s warned.
Illinois Gov. J.B. Pritzker, who inherited the state’s pension woes when he took office in January, has a task force exploring asset transfers to bolster the 40% funded ratio and ease rising contributions and he extended an existing employee buyout program. He dropped plans to re-amortize the current schedule to reach a 90% funded ratio by 2045 and to issue pension bonds.
Climate
Climate change-related heat also poses a strain for local governments in western Illinois, Moody’s writes in a new report.
The Midwest and Southeast face more exposure then other regions, Moody’s said citing data from the climate intelligence firm Four Twenty Seven which measures U.S. counties' heat stress based on projected relative increases in extreme temperatures, extreme heat days and energy demand.
About $190 billion, or 21% of the $895 billion in outstanding local government rated debt was issued in at risk-counties with nearly 80% of the figure based in the Midwest and Southeast.
Counties in central Midwest states face the highest risk of extreme temperatures including Illinois and Missouri based on comparisons between the projected 2030-2040 period and a historical period of 1975-2005. Counties in the Southeast are expected to experience a greater number of extreme heat days, but will likely be better prepared given their acclimation to high temperatures, Moody’s said.
The Southeast, especially Florida, has the most outstanding debt exposed to elevated heat stress, followed by the Midwest, largely in Illinois. Several Northeast states with large amounts of debt outstanding have low exposure to heat stress, notably New York and Pennsylvania.
“Heat stress threatens to cause local governments to pay unanticipated costs for emergency response, infrastructure repair and adaptive strategies,” Moody’s warned. “Nevertheless, the Southeast and Midwest each have various strengths that provide a comparatively strong cushion: the Southeast with large tax bases and growing populations and the Midwest with its healthy cash balances and median family incomes."
