CHICAGO — The underfunding of public pensions by Chicago and Illinois puts much bigger burdens on their balance sheets than what national counterparts face, Moody's Investors Service says in a new report that highlights the disparity.
Moody's puts the state's "adjusted net pension liabilities," which incorporates market value discount and market value of assets, at $186.8 billion in fiscal 2012. Illinois reported its unfunded liabilities on an actuarial basis at about $100 billion for fiscal 2013.
Moody's places Illinois' three year average ANPL at 258.4% of revenues, far ahead of the next worst, Connecticut, at about 200%. A handful of other states fall in the 180% range with the median at 51.2%, according to the report "Illinois State and Local Governments Face Daunting Pension Challenges" published Friday. It was authored by analysts Thomas Aaron, Timothy Blake, and Ted Hampton.
Chicago sits alone among its peers, the 50 largest local governments by gross direct debt, in being classified by Moody's as "poor" based on 2012 figures, using the rating agency's three-year average ANPL compared to operating revenues and full property valuation.
Chicago Public Schools falls in the weak category on assessed valuation along with just seven others and the more crowded moderate category when compared to operating revenues. Cook County falls into the moderate category on both comparisons.
Moody's assigns a $32 billion ANPL to Chicago, a $12.7 billion ANPL to Cook County, and a $12.1 billion one to Chicago Public Schools. All three have suffered credit deterioration over their unfunded pension obligations and the added burden of relying on much of the same property tax base although Cook benefits from its inclusion of some suburbs.
Pension reforms passed by state lawmakers late last year for four of Illinois' five funds and earlier this year for two of Chicago's four funds will help, Moody's said, but the sheer size of the underfunding means measureable strides in the funds' health will take some time to realize — and that's if the reforms survive a challenge.
Labor groups have filed litigation arguing the state reforms violate the state's constitution's strong protections afforded to pension benefits. A challenge to the city reforms has been threatened but not filed.
"Even if these and similar local-plan reform laws are allowed, unfunded pension liabilities for both the state of Illinois and some local governments have grown so large that fully paying them down will prove challenging for many years," the Moody's report warned.
Illinois' general obligation bonds carry an A3 rating and negative outlook from Moody's and Chicago GOs are rated Baa1 with a negative outlook. Chicago Public Schools is also rated Baa1 with a negative outlook and Cook County is rated A1 with a negative outlook. Cook sought state legislative approval for a reform package this spring but it stalled.
Illinois is one of only seven states with "explicit constitutional protections against impairment for public employee pension benefits," Moody's said. "These protections have been interpreted as preserving plan benefits for each participant as they exist at the start of employment ultimate success and sufficiency of ongoing efforts remain uncertain."
Some have raised concerns that the Illinois Supreme Court's recent ruling that retiree healthcare subsidies are protected by the state's pension clause bodes poorly for the pension reforms. Moody's cited language in the ruling in which a majority of justices found that protections "must be liberally construed in favor of the rights of the pensioner."
Moody's noted that the court, however, did not rule on any legal arguments. The Illinois Attorney General will argue that the state had no other option but to trim benefits to save the funds and avoid drastic state spending cuts that would harm the public good.
The status of many other local government funds throughout the state is mixed, with many making contributions that meet an actuarially required contribution level. Some are struggling with the health of their public safety funds and face a spike in payments in 2016 under a state mandate. Most participate in the state's better funded Illinois Municipal Retirement Fund to cover their general employees.
