CHICAGO - Chicago needs Illinois Gov. Pat Quinn to sign legislation overhauling two of its pension funds so it can move on to a more elusive fix for its other two funds, the city's top fiscal officer said Wednesday.
"We really need the governor to sign" the legislation overhauling the laborers and municipal workers' funds "so we can begin the tougher task of dealing with police and fire," said Chicago chief financial officer Lois Scott. The legislation trims benefits including cost of living adjustments, and raises city and employee contributions.
The comments came during a panel discussion on the city's financial future during a conference Wednesday -- "After Detroit: How will Illinois and its Communities Respond" — hosted by the Civic Federation of Chicago and the Federal Reserve Bank of Chicago.
Quinn's administration has said the governor is still reviewing the legislation, which was approved earlier this month. It would stabilize two funds now on course to exhaust their assets in the next decade. Quinn's criticisms of language in the original bill requiring a property tax hike to fund at least 50% of the city's increased contributions prompted the city to strip out the language.
The city still intends to primarily rely on a property tax hike to generate $750 million in additional contributions over five years, when payments would then reach an actuarially required contribution level. City council approval would be needed to raise the levy.
At least 38 labor groups were impacted. The Chicago Federation of Labor put together a pension working group and Scott said: "We negotiated with them .we listened to them labor was a partner here."
Several unions openly supported the package of reforms, while most took a neutral stance. Several groups attacked the legislation and have urged Quinn to veto the bill. The city likely faces a state constitutional challenge if Quinn signs the package.
The city's massive $19.5 billion unfunded pension tab has driven its sharp credit deterioration, notably from Moody's Investors Service downgraded Chicago three notches last year and then struck again earlier this year with another one-notch downgrade. The city is now rated Baa1 with a negative outlook by Moody's.
Fitch Ratings also last year dropped Chicago's rating three levels to A-minus and it assigns a negative outlook. Standard & Poor's rates the city's general obligation bonds A-plus with a negative outlook.
The municipal fund is just 38% funded and on course to drain assets between 2023 and 2027 while the laborers fund is 58% funded and on course to drain assets between 2024 and 2031.
Rating agencies have said the changes will help stabilize the two funds but their benefits of the overhaul will take some time develop while liabilities will remain high for some time. The plan "would eliminate the threat of pension insolvency facing two of the city's four plans," Fitch wrote recently. "However, long-term pension fund sustainability is many years away Fitch believes it will be many years before meaningful reduction in the unfunded liability is evident."
Scott said central to the long-term solvency of the funds is the shift to an ARC payment in 2019 from one that bases city contributions on a percentage of employee contributions.
The city is now focused on seeking separate legislation delaying the $600 million spike in funding for its police and fire funds under a prior state mandate, while overhauling benefits for those plans. The police fund carries $6.9 billion of unfunded obligations and the fire fund $3.1 billion.
Scott refused to say whether the city would push the General Assembly to delay the payment spike without seeking a reform package at the same time but reiterated Emanuel's position that "revenues and reforms must go together."
Another panelist, Richard Ciccarone, who heads up Merritt Research and is a co-chair of the Civic Federation's pension committee, took rating agencies to task for city upgrades in past years despite growing unfunded pension liabilities. His presentation examined the role of rating agencies as fiscal disciplinarians.
In upgrading the city following ratings recalibration, Ciccarone said the agencies "weren't encouraging fiscal discipline" because the city's contributions fell far short of ARC levels and those rating actions "didn't help the situation" as there was little political incentive to tackle a tough public issue. Little action was taken by the city to stave off pension fund deterioration aside from former Mayor Richard Daley's appointment of special task force to examine the subject.
Ciccarone said rating agencies typically act more in the role of evaluator than policeman until fiscal challenges worsen and their focus is more on "here and now" conditions. A "better approach would be to distinguish credits with long term structural vulnerabilities earlier in the rating assignment," he said.
Ciccarone said during his career as a research officer on the buyside "we took a view of credit momentum" with rating agency assessments serving as a benchmark but decisions on bond purchases depended on an internal assessment of value.
Scott said during meetings with investors ahead of the city's recent GO issue, she saw "unprecedented" work done by investors' internal research staff.
Ratings, however, remain key as they are embedded in key bond documents, lines of credit, and swap trigger events, Scott said.
