Chicago Park District outlook slips on pension woes
The Chicago Park District’s outlook was revised to negative from stable by Fitch Ratings this week on concerns about the district's severely underfunded employee pension fund. Fitch affirmed its AA-minus rating.
The district, which has been working on a revised pension funding scheme since a court voided a 2014 pension overhaul that was designed to stave off insolvency, is on course to exhaust assets in 2027.
After that, the district would be subject to paying retiree benefits on a pay-go basis, a level more than double current employer contributions. Benefit payments are forecast to be $89 million in that year based on the plan's most recent valuation.
The outlook change to negative reflects the risks posed by growing pension contributions on spending flexibility, Tuesday's Fitch report said. Fitch warned that carrying costs for pensions will continue to increase over the medium term, even if reforms are passed, in order to stabilize pension funding.
“Failure of reform legislation now before the legislature, or evidence that reforms, if passed, may not sufficiently stem further funding erosion could lead to a downgrade,” the rating agency said.
The voided legislation increased the retirement age for some employees, changed the formula used to calculate automatic annual increases for both current and future retirees, eliminated automatic annual annuity increases in 2015, 2017 and 2019, and raised employee and employer contributions.
The new plan relies on increased contributions with revenue coming from the personal property tax replacement funds freed up in a September bond refunding deal along with “programmatic and recreational fees and moderate increases in property taxes.
The plan needs to be formalized by the Illinois General Assembly, but under its terms the district is bumping up its pension contribution $6.2 million, getting most of that from a tax increment financing surplus.
The district presented a $487 million fiscal 2020 budget in November that is 5% higher than the 2019 adopted budget. Part of the increase is from higher pension contributions. The district will use $5.3 million of the TIF surplus revenues toward the $6.2 million in increased pension contributions. The annual pension cost appropriation is $33 million, which accounts for 6.9% of budgeted expenditures.
“This increase is based on actuarial projections as the District begins a four-year pension payment ramp up to help stabilize the pension fund,” said Chicago Park District General Superintendent Michael Kelly in a statement. “Despite contributing more than 2.5 times the amount we are required to under statute, the required contribution needed to avoid insolvency is nearly double this amount.”
The pension fund was just 32% funded in 2018, down from 37% in 2017, according to a 2018 actuarial report prepared by Segal Consulting. Total unfunded liabilities rose to $775 million from $654 million, with $83 million of the growth due to assumption changes.
Kroll Bond Rating Agency rates the district AA with a negative outlook; S&P Global Ratings assigns its AA-plus rating and a stable outlook. Moody’s Investors Service assigns a junk rating citing the district's links to Chicago. Both city and district are rated Ba1 with a stable outlook.
The district has nearly $800 million in general obligation bond debt.