CHICAGO — Rating agencies offered modestly positive comments on Chicago's proposal to save its laborers' pension fund from insolvency.
The positives were tempered by concerns over the bigger and more costly challenge posed by the city's much larger municipal employees' pension fund and continued growth in the city's unfunded liabilities.
Chicago's collective $20 billion of unfunded obligations in its four funds has dragged the city's credit down, and all four rating agencies assign a negative outlook to the city's general obligation debt. Moody's Investors Service has it at a junk level Ba1 and Fitch Ratings is at the lowest investment grade level of BBB-minus. Kroll Bond Rating Agency and S&P Global Ratings assign their BBB-plus rating.
Kroll and Fitch downgraded the city after the Illinois Supreme Court in March voided 2014 reforms to the laborers and municipal funds.
"It would give them a measure of certainty for the pension funding situation for the laborers," Fitch analyst Arlene Boehner said in an interview Wednesday of the plan announced Monday. "The hardest part of the situation is not knowing what the approach will be so to the extent that you have certainty that is a positive."
Boehner reserved any further comment on the plan until an actuarial assessment is available. The city did not provide one nor did it provide details on the payment ramp and projected growth in funded ratios.
"There's still a fair amount of uncertainty," she said, given that a solution to the municipal funds must also be achieved. Fitch appears to be giving the city some time.
"When we took our most recent rating action we did that with the assumption that it would take some time to come up with a plan, to pass it, and to implement it," Boehner said.
The plan calls for Chicago to raise its contributions to the laborers' fund by at least 30% annually over the next five years to reach an actuarially based payment with an additional $40 million of annual revenue generated by a 2014 telephone fee surcharge. The fund would reach a 90% funded ratio in 40 years.
Current tier two employees who started after 2010 could shave two years off their retirement age if they agree to contribute more. Retirees and employees hired before 2011 face no changes. The voided reforms had outright cuts benefits in violation of the state constitution, the high court said in its opinion.
"KBRA views positively, as a first step, the funding agreement reached with two bargaining units, whose members participate in the city's laborers' retirement fund," said Kroll Bond Rating Agency analyst Harvey Zachem, underscoring that state legislative approval is needed and that there remains no solution for Chicago's much larger municipal employees' pension fund.
"KBRA believes these negotiations are more complex, and require a much larger funding increase than is necessitated for the laborers' agreement," he added.
In a commentary released Wednesday, Moody's analysts Matthew Butler and Rachel Cortez focused more on providing an overview of the plan and the city's persistent pension challenges than on offering a positive or negative assessment.
"The agreement's most significant component is increased city funding," they wrote. "Absent corrective action, laborer plan actuaries had projected asset depletion by 2027."
Moody's noted that because benefits accrued by active tier two employees make up just 0.3% of the laborer plan's reported liability, employees who elect early retirement will have a minimal effect on the plan's liability. In comparison, the city's failed pension reform plan had reduced the liability by 13%.
"Accommodating higher pension contributions to all four city pension plans — Municipal, Laborer, Police and Fire — in annual operating budgets will be an important factor in Chicago's credit trajectory," Butler and Cortez wrote.
Moody's also highlighted the recent release of 2015 actuarial reports for both the municipal and laborers' funds that showed significant erosion.
The laborers' fund, which serves about 8,000 members and is on course to deplete assets in 2027, saw its unfunded obligations rose to $1.2 billion in 2015 from $754 million in 2014 with its funded ratio falling to 53% from 64.3%.
Under new accounting rules, the net pension liability for the two funds that must be reported on the city's balance sheet skyrocketed by about $13 billion while the unfunded liabilities of the two rose a more modest $3 billion.
Moody's uses its own calculation that it calls an adjusted net pension liability figure. Moody's calculation for the laborers fund also rose, but by a much more moderate amount, limiting the credit impact, analysts said.
The measurement on net pension liabilities under the new accounting rules is heavily influenced by projected asset depletion so the proposed plan, if approved by state lawmakers, would allow for a higher discount to be applied. That should reduce the net pension liability in the valuation report released in 2017, Moody's said.
