Moody’s is looking for Chicago to outline how it plans to save two pension funds in the wake of an adverse court ruling.

CHICAGO – Chicago can't afford much of a delay in outlining a "clear plan" to stabilize its municipal and laborers' pension funds after the Illinois Supreme Court ruling nixed its 2014 reforms, Moody's Investors Service said Tuesday.

Moody's branded the court's ruling last week as a credit negative. Moody's rates the city's general obligation debt at the junk level of Ba1 with a negative outlook. The ruling frees up about $100 million that the city had agreed to provide for the plans this year as part of the now-dead reforms, but puts the two funds back on the path toward insolvency in the next 10 to 13 years.

"Delayed implementation of a clear plan to fund municipal and laborer pension plan liabilities will likely weaken Chicago's credit quality," Moody's wrote. "Additionally, poor asset performance relative to plan investment return assumptions will be a key credit determinant."

The funds' 2015 results don't help. Investment reports suggest that the municipal plan saw just a 1.8% return while the laborer's plan lost 1.5%. Both assume a 7.5% return.

The state Supreme Court upheld a July ruling at the circuit court level declaring the 2014 reform legislation unconstitutional because changes that cut benefits violate the state constitution's pension clause. Many expected the ruling after the high court voided of the state's own 2013 reform package that also cut benefits, but the city had held out hope because it offered differing legal arguments.

"Although the court's decision is not surprising ….its effect on Chicago's plan to address its outsized pension debt is a credit-negative setback for the city," Moody's said.

The city's four funds are saddled with $20 billion of unfunded liabilities with the laborer's and municipal funds accounting for half and the police and fire funds the other half. Under Moody's adjusted figure, the liability stands at $32.5 billion.

The failed reforms had reduced unfunded actuarially accrued liabilities by 18% by replacing the plans' 3% annually compounded cost of living adjustment with a simple annual COLA equal to the lesser of 3% or half the rate of inflation. The plan called for the phasing in of a shift from a statutory funding formula based on a percentage of payroll to an actuarially required contribution to bring the funds to a 90% funded ratio in 2055. Employees were also required to pay more.

The reforms called for city contributions to rise by nearly $100 million to $300 million this year with the payment hitting $600 million in 2020 when the shift to an ARC would be completed. Under the statutory funding scheme, the 2020 payment is just under $200 million but the plans would exhaust assets in the next decade. The city raised a telecommunications tax to cover the near-term payment hike but it's unclear how it will tackle future growth in payments.

Without the reform package's benefit cuts, contributions to meet the city's proposed funding schedule under the failed legislation would have to rise even further if the city sticks with that amortization plan.

Funding the plans on a "pay-go basis in the event of plan insolvency, while also contributing to its two public safety pension plans, would be a substantial cost burden on Chicago," Moody's said.

Moody's notes that the city could seek higher employee contributions through negotiation and further extend the amortization period. The former would have just a modest impact and the latter would come at the expense of a rapidly rising pension debt as benefits under the amortization plan built into the failed legislation were slow to materialize. Under the plan, the unfunded liabilities continued to rise for 20 years before tapering off and reaching the 90% funded ratio in 2055.

Fitch Ratings on Monday dropped its rating on $8.9 billion of city GOs two notches to the lowest investment grade level of BBB-minus. The city carries a BBB-plus and negative outlook from Standard & Poor's and an A-minus rating with a negative outlook from Kroll Bond Rating Agency.

Mayor Rahm Emanuel's administration said it's evaluating various proposals and officials told Fitch and Standard & Poor's that it will outline a new strategy to address the increased burden resulting from the ruling in the next several weeks.

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