CHICAGO – Chicago received an outlook boost from S&P Global Ratings, to stable from negative.
Recent passage of a new water-sewer tax will help stave off looming insolvency for the city's largest pension fund, S&P Global Ratings said Friday.
"We view this as a positive step to address the city's underfunded pensions," analyst Helen Samuelson said in the rating agency's report. S&P affirmed the city's BBB-plus rating general obligation bond rating.
The city's repair plan for its municipal employees' pension fund relies on increased city contributions from the new tax on water usage and from enterprise funds as well as higher contributions from new employees. The plan phases in over the next five years a shift to an actuarially based contribution.
The shift to a stable outlook represents a big step after Chicago was hammered with downgrades over the last two years. S&P's action followed a similar move by Fitch Ratings in late August.
The city was eager to share the news.
"S&P's action is a recognition of the strength of Chicago's economy and our ongoing work to finally tackle decades of financial mismanagement," Mayor Rahm Emanuel said. "The progress we are making has not occurred without tough choices, but this shows hard work pays off – all four pension funds are on a path to solvency and our budget gap is the smallest it has been in nearly a decade."
Emanuel was referring to the city's $137 million budget gap. He will unveil a proposed 2017 budget on Tuesday that he pledge won't include "any general tax increases."
The new tax phases in a 29% hike in water and sewer rates. The plan establishes a funding schedule that puts the municipal fund on track to reach an ARC in 2022. After 2022, the city's proposed funding scheme will fall more than $250 million short of what's needed to meet payment requirements.
The plan calls for the city to pour $2 billion more into the fund over the next six years than the current $1 billion it owes under the existing statutorily based funding formula in which city contributions are based on a percentage of what employees contribute.
But it will take decades to see healthy improvements in the funded ratios.
State lawmakers still must sign off on the changes.
The municipal employees' fund has $9.8 billion of unfunded liabilities and $18.6 billion of net pension liabilities under new accounting rules. The city's total net pension liabilities are $33.8 billion. The city previously announced a restructuring of its small laborers' fund, which also still requires state approval, and enacted a record $543 million property tax last year to fund higher contributions to its public safety funds.
The city's pension tab has dragged its ratings down, leaving it with one junk rating of Ba1 from Moody's Investors Service.
The city's GOs are rated BBB-plus by Kroll Bond Rating Agency. Fitch has the city at the lowest investment grade level of BBB-minus. Moody's and Kroll still assign a negative outlook. Kroll has said it views the new tax as a positive but Moody's has been tougher, pointing out the long road that remains ahead of the city to improve its funded ratios.
S&P also made clear the city is not yet out of the woods on pension funding. “In our view, the city's progress on these items could be impeded by poor market returns in the pension plans, whichcould put additional future pressure on the various identified revenues above and beyond current expectations,” analysts added.
