CHICAGO — Standard & Poor's is warning that Chicago's "surprise" mayoral runoff could delay the city's response to a looming $550 million to $600 million hike in its public safety pension payments.
"This temporary speed bump puts into question a plan the city has been working on for the past four years and will mean the next administration will need to determine how to fit this cost into its budget in less than a year," analysts wrote in the special commentary released late Wednesday.
Mayor Rahm Emanuel was the top vote-getter in the nonpartisan contest Tuesday but he failed to garner a majority and therefore faces second-place Jesus "Chuy" Garcia, a Cook County board commissioner, in an April 7 runoff.
The timing of the election, and now the runoff, comes amid a looming reckoning for the city's public safety pension liabilities.
Budget watchdogs, academics, and analysts have labeled it the city's worst fiscal crisis in decades. The city faces a big spike in its police and firemen's funds due in 2016 under a prior state imposed mandate aimed at stabilizing public safety retirement funds statewide by requiring them to make annual payments on an actuarial basis. The city has funded made public safety payments on a schedule determined in state law that has allowed the funds to become increasingly underfunded.
Standard & Poor's stressed that no action was taken on the city's A-plus rating or its negative outlook. Chicago's unfunded pension pressures from $20 billion of unfunded obligations have driven a dive in its credit ratings in recent years.
Emanuel has argued that the state should allow the city to slowly phase in the higher formula for funding payments in connection with benefit reforms. Lawmakers have not taken any action.
City negotiations with unions are on hold as all await an Illinois Supreme Court decision on the constitutionality of a 2013 reform package that cut state retirement fund benefits as the outcome stands to influence each party's negotiating position.
"We will be monitoring how this short-term pension obligation will affect the city's general obligation rating as well as how the next administration will address long-term pension issues that have been weighing on the city's credit standing," Standard & Poor's wrote.
The next mayor must identify the means for funding the additional higher payments even if the size is reduced through legislative action and a long-term plan. Emanuel has warned the city can't raise property taxes enough to make the higher payments without damaging the tax base.
"The uncertainty of how this issue will be addressed prevents the city's credit outlook from being stable at this point," analysts wrote.
Standard & Poor's noted that the city is also not out of the woods yet with reforms adopted last year for its municipal workers' and laborers' pension funds. A legal challenge is pending in state courts and in order to win state approval the city backed down from a near-term plan to heavily rely on property taxes to cover its higher contributions.
"Whether these challenges are successful or not, at this point the amount of increase that could occur from the municipal employees and laborers' plans has a place in the city's budgets, with an identified revenue stream," analysts wrote. "These costs will increase gradually over time and a credit factor will be whether the identified revenue stream can keep up with the costs."
The commentary highlights the source of the city's pension pain, with payments set by a statutory formula that falls far short of the annual actuarially required contribution. The city's payments to its four funds represent just 26% of an ARC payment. A full ARC payment given the size of the city's unfunded obligations would consume 27% of city spending.
Standard & Poor's said Chicago's credit benefits from "a strong base from which revenues can be supported. It has a vibrant economy which supports the city's credit quality.
"As the city awaits voters' final say on who will be the mayor, the city's credit awaits a longer term resolution to its pension troubles. One answer will be found in six weeks, the latter may take some more time," analysts wrote.
The city operates on a $7.3 billion 2015 budget. Its GOs are rated A-minus by Fitch Ratings and Baa1 by Moody's Investors Service. They also assign a negative outlook. Any further cut by Moody's would potentially trigger swap termination events.
The city's Firemen's Fund has $3.15 billion of unfunded obligations and is 24.2% funded. The Policemen's fund has $7.2 billion of unfunded obligation and is 30% funded. The Laborers' fund has $1.04 billion of unfunded obligation and is 57% funded while the Municipal Employees fund carries $8.7 billion of unfunded obligations and is 36.9% funded.
