CHICAGO – Chicago’s proposal to rescue its municipal pension fund from looming insolvency with a new water/sewer tax is a positive step that if finalized could stabilize the city’s rating, S&P Global Ratings said Monday.
S&P rates Chicago GOs BBB-plus with a negative outlook.
“The city announced plans for a new water/sewer tax to support larger contributions into its municipal pension plan, which we consider a positive step to address the city's underfunded pensions," wrote analyst Helen Samuelson.
“An outlook revision to stable would be predicated by the city formalizing the water/sewer tax, which would support larger contributions into its municipal pension plan,” according to Samuelson.
City council approval of the new tax, unveiled by Mayor Rahm Emanuel last week at the city’s investors’ conference, is still needed and state lawmakers must sign off on changes to the pension payment scheme because the current formula is set in statute. Emanuel intends to seek council approval in September and will present the General Assembly with legislation for consideration during its annual fall veto session.
S&P is the first of the four rating agencies that rate Chicago’s GOs to weigh in with a published commentary on the city’s proposed municipal employees’ fund fix. The city’s $22.6 billion of unfunded pension liabilities – and $33.8 billion of net pension liabilities under new accounting rules -- have dragged its credit down as low as junk-level Baa1 from Moody’s Investors Service.
Without change, insolvency looms in 2025 for the municipal employees' fund. Under the city’s proposal, a tax would levied on water and sewer bills based on based on water usage. Increases would be phased in over five years, when it would generate $239 million more annually to help cover higher city contributions to the fund.
The Emanuel administration said the report highlights the need to get the tax plan in place. "In other words, until city council and Springfield pass the revenue increase and funding plan, the city will remain on negative outlook, which does not reflect the true strength of Chicago's economy and ongoing willingness of city leaders to address decades of financial mismanagement," the administration said in a statement.
The city would also tap its general fund and the water/wastewater enterprise, whose employees are pension fund members. The city's aim is to reach a more actuarially based contribution by the end of the five-year ramp, similar to funding schemes adopted for the police and firefighters pension funds and one proposed for its laborers fund.
The end goal is to reach a 90% funded ratio in 40 years. New employees would pay more into the fund and employees hired since 2011 would have the option of contributing a higher amount in exchange for lowering their retirement age.
Trading on Chicago's tax-exempt general obligation bonds got a slight price bump after the pension announcement last Wednesday, with spreads on some paper narrowing slightly by 10 to 15 basis points over trading earlier in the week. The city's spreads have ranged from about 250 basis points to 300 basis points over the last year.
Illinois Supreme Court rulings have severely limited the city's ability to cut benefits for current employees and retirees. The city’s recently announced laborers' pension plan relies on an already approved 9-1-1 surcharge. A record property tax hike approved last year will be used to help cover higher police and fire contributions.
The city has now "met our challenges head-on and dealt with them" in a way that doesn't undermine the overall strategy, Emanuel said at the conference.
Some analysts and investors have warned that the city’s revised funding schemes fall far short of stabilizing the system because funded ratios won’t improve for decades and could be knocked off course by poor investment returns.
The city's GOs are rated at the junk level of Ba1 by Moody's Investors Service and BBB-plus by Kroll Bond Rating Agency and S&P Global Ratings. Fitch Ratings has the city at the lowest investment grade level of BBB-minus. All carry a negative outlook.
S&P said it also expects the city to stick with its pledge to end its use of scoop and toss debt restructuring by 2019 and to carry through on reaching full actuarial funding of all pensions by 2022, with those contributions matched by predictably-performing revenue while also making progress toward a sustainably balanced budget. The city recently announced its structural deficit was down to $137 million.
S&P said the impact of the various tax hikes on the city’s tax base remains to be seen but analysts believe “the city's strong, deep, and diverse economic base is capable of supporting the revenues needed to address its goal of achieving full actuarial funding of all pensions by 2022.”
