CHICAGO – Chicago made progress last year in boosting its liquidity and tackling its pension burden, fiscal pressures that have weighed on the city’s books and dragged its ratings down.

According to the city's 2017 comprehensive annual financial report released Wednesday, the net pension liability dropped to $28 billion from $35.7 billion as city funding increases approved last year were reflected in actuarial statements. Still, the funded ratios remain weak and will take years to improve.

Moody’s Investors Service recognized the pension strides Thursday by lifting the city’s outlook to stable from negative. It left the rating at Ba1, one notch below investment grade.

The action was partially based on “the expectation that Chicago will not face significant budgetary obstacles in the next two to three years given recently enacted tax increases to finance rapidly growing pension contribution requirements,” Moody’s said.

Chicago's chief financial officer, Carole Brown, accepts theFreda Johnson Award for Trailblazing Women in Public Finance at The Bond Buyer Deal of the Year event in New York on Dec. 6, 2017.
Chicago’s Chief Financial Officer Carole Brown says growth in fund balances and a cut in the city's net pension liablitites are signs of the city's fiscal progress. Doug Goodman

Chicago Chief Financial Officer Carole Brown pointed to the steady growth in fund balances that along with reserves adhere to governmental best standards and the net pension liability slide as signs of the city's progress in the CAFR.

The fund balance growth “demonstrates the kind of financial discipline we are trying to apply to our entire financial operation,” Brown said in an interview Friday along with city Comptroller Erin Keane. Three years ago, the city committed to limits on the use of the previous year’s fund balance and has since stuck by them.

“We addressed our pensions head on, identified funding from recurring revenues, and we worked to get the legislation passed” at the state level, with the impact now fully reflected in the actuarial reports.

“It’s good news whenever something that’s been under stress shows signs of stabilizing and there are indicators that suggest that,” Richard Ciccarone, president of Merritt Research Services LLC, said after a preliminary review of the CAFR.

The city has benefited over the last year from economic growth and continues to attract big-name corporate headquarters. At the same time taxpayer flight may pose “great” concern but so far the evidence suggests it’s been “modest,” Ciccarone said.

Amid the progress, he added, “Chicago got itself into a hole on liabilities and that hole is still fairly deep.”

Howard Cure, director of municipal bond research at Evercore Wealth Management LLC, credited the city for taking steps to improve its financial position with increasing a dedicated taxes to help solve pension issues. “Also, eliminating their practice of debt scoop and toss is a positive,” he said. “Fund balance levels are also healthy with small contributions made last fiscal year.”

The city is phasing in higher contributions under Mayor Rahm Enmanuel’s overhaul of the city’s four pension funds to reach an actuarially determined contribution, or ADC, in two to four years. Funded ratios will remain weak for years down the road and the city has not yet fully identified how it will pay for future hikes.

“There are clearly big challenges ahead in dealing with employee liabilities,” Cure said. “Also, while the city has made significant changes in taxes and operations to help with their budget, the economy has been growing. How prepared, or ill-prepared, is Chicago for the next recession and what will that mean for their still healthy reserve levels?”

Brown said the city is laying the foundation through better planning and discipline to manage the upcoming pension increases and to get through a downturn because of the current economic gains. She pointed to improvements in the city’s corporate image and tourist draws, capital improvements underway like a modernization of O’Hare International Airport, and improving financial metrics seen in the CAFR.

Market participants say the city risks tax fatigue to address pensions, especially given the pension woes of its sister agencies and Cook County, and that spending cuts may be a difficult road.

“We understand and know that the contributions are going up,” Brown said. “We are going to do what we need to do” and will continue on planning for the increases to allow the city to better absorb them into the budget. “We are no longer managing obligations from a point of crisis but from a point of planning” and the finance team is no longer feeling “panicked” as they have been in the past.

The city will hold its annual investor conference Aug. 2, with the fresh data from the CAFR and its annual financial analysis that's released at the end of July for the buyside to digest. The city's 20-year general obligation paper traded Friday a 136 basis point spread to the Municipal Market Data's top benchmark, said MMD strategist Daniel Berger. That's a sharp improvement from a year ago and a few basis points better than a week ago.


The fund balance in the city’s $3.72 billion corporate fund grew to $288.4 million from $269.6 million in 2016 due to “the improving economy, enhancements in revenue systems, and ongoing expense reductions and savings,” the city said.

The unassigned portion of $155.5 million remained nearly on par with the previous year’s unassigned level of $153.7 million. The city had a $215 million balance — of which just $93 million was unassigned — in 2015 and it’s steadily been on the rise in recent years.

The fund balance hit a low of $33 million in 2012.

The city’s books benefit from a $550 million long-term reserve set up with the 2005 Skyway Tollroad lease and has deposited $15 million into an operating liquidity fund in $5 million increments over the last three years to help manage liquidity.

The city’s net position of governmental activities, which provides a fuller overall picture of the city’s financial health based on its long-term expenses and assets, slipped as the net deficit rose to $28.7 billion from $27.5 billion in 2016, though that marks a sharp drop from the $3.5 billion added a year before.

“This deficit does not mean that the city does not have the resources available to pay its bills next year. Rather, it is the result of having long-term commitments that are greater than currently available resources,” reads the CAFR prepared by Deloitte & Touche LLP.

The city ended 2017 with $9.4 billion of outstanding GO debt, up from $8.7 billion a year earlier, and $337.2 million of GO certificates and other related obligations, down from $519 million in 2016. No GO borrowing is planned this year.

The city also had $744 million of sales tax securitization bonds that sold under a new credit established last year to refund up to $3 billion of existing sales tax and GO debt. The 2017 sale generated savings of $46.3 million. The city sold a smaller tranche early this year and will return in the fall with another deal.

The city also had $254.2 million of motor fuel tax bonds, $27.9 million of tax-increment financing debt, and $14.7 billion of enterprise debt — up from $13.2 billion. New money water, wastewater and O’Hare International Airport deals are expected this year.

The city's infrastructure related capital assets increased $1.1 billion and general fund expenses came in $96.1 million less than budgeted due mainly to lower personnel costs.

Fixed costs including debt service, pensions, and OPEBs, ticked up to 28% from 24.6% but in a notable good sign the city’s estimated full valuation continued to grow, landing at $293 billion, a high since 2009. “That’s critical for the city because it has to be able to grow its tax base when its fixed costs are rising,” Ciccarone said.

Brown said the continued refunding of GO debt through its sales tax securitization corporation this year will help ease GO debt service costs.


The city shaved its net pension liabilities to $28 billion from $35.7 billion. The prior jump several years ago was primarily due to a change in accounting standards that required the reporting of a net pension liability, or NPL. That differs from the accrued unfunded liability – the difference between assets and obligations – because of how the discount rate and other factors are calculated.

The big changes in 2017 came in the municipal and laborers’ systems as the 2017 funding legislation and other actuarial changes were incorporated. With two of the funds no longer headed toward insolvency, the liability fell to reflect changes in how the discount rate is applied.

  • The municipal fund’s NPL dropped to $11.7 billion from $18.9 billion;
  • The laborers’ fund dropped to $1.4 billion from $2.5 billion;
  • the police fund rose to $10.3 billion from $10.2 billion;
  • The firefighters’ fund rose to $4.6 billion from $4.1 billion

“This is more of an accounting change than an actual multimillion-dollar benefit as while there are increases in future contributions, there is also an increase in the discount rate,” Cure said. “Additionally, the measure also includes a 40-year amortization period to reach a 90% funded ratio. This locks the city into negative amortization for many years as contributions into the plan won't even cover the interest on the unfunded liability, causing it to continue to grow over that horizon.”

The four systems remain at weak funded levels. The municipal fund’s funded ratio declined slightly to 27.4% from 30.5% on an actuarial basis. The laborers’ funded ratio fell to 48.3% from 50%. The city’s $48 million contribution this year falls short of a $129 million ADC, according to the laborers’ actuarial report.

The city is funding increased payments through higher property taxes, a water-sewer charge, and 9-1-1 surcharge. The water-sewer charge will also see it through the first year of the actuarially based payment due in 2023 to the muni fund.

The city is facing a $300 million leap in pension payments due in 2021 on police and fire and $330 million due in 2023 on muni and laborers. Total payments will rise from $1 billion to an estimated $2.2 billion due in 2023 when all funds hit an ARC, according to the city’s 2017 annual financial analysis.

The city’s ability to fund future increases is complicated by other governments’ overlapping burdens. “You have to view the entire tax burden on city residents to determine what sort of flexibility there is for further tax increases,” Cure said.


Moody's action impacts just $6.7 billion of rated GO debt as the city several years stopped asking Moody’s for ratings. Moody’s dropped Chicago to junk after the May 2015 Illinois Supreme Court ruling overturning state pension reforms as it dampened city efforts at pension reform.

The city’s GOs are rated BBB-minus by Fitch Ratings, A by Kroll Bond Rating Agency, and BBB-plus by S&P Global Ratings.

“The city is adhering to its five year plan to increase pension contributions as required by state statute while maintaining healthy financial reserves and liquidity,” Moody’s said.

Factors that could help Chicago get out from under the junk label include the successful absorption of the looming funding increases without the use of reserves or nonrecurring budget maneuvers and a moderation of the city's pension burden from rapid economic and revenue growth or reduced liabilities.

Moody’s also said that a substantial diversion of city revenues to special-purpose entities that materially reduces available resources to pay GO bond holders. The city has so far diverted its share of sales taxes.

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