CHICAGO – Standard & Poor's gave Chicago Mayor Rahm Emanuel little time to revel in passage of the record property tax hike his administration bills as the salve for the city's pension ills.
In a commentary that followed passage of the city's $7.8 billion 2016 budget and $543 million annual property tax hike, Standard & Poor's said they represent notable progress but analysts warned that the city's balance sheet will long remain strained.
"While the actions taken in this budget to raise property taxes are intended to address the cost pressures in 2016, they may not be sufficient to mitigate the city's financial stress," analysts wrote. "In our view, the extent of the city's structural imbalance, when factoring in required pension contributions, will take multiple years to rectify."
The city's $20 billion tab of unfunded pension obligations, the slow pace at which the city intends to stabilize the funds with higher payments, and the need to fund higher payments will continue to "place pressure on the city's budget--one of the primary drivers of our rating," wrote Chicago analysts Helen Samuelson, John Kenward, and Jane Ridley in the commentary published Wednesday.
Standard & Poor's rates Chicago's general obligation debt BBB-plus with a negative outlook. That's three levels higher than the junk level rating of Ba1 assigned by Moody's Investors Service, which also applies a negative outlook.
Standard & Poor's did label passage of the property tax increase – that raises the levy incrementally over the next four years to generate $543 million more annually once fully phased in – an "important first step" toward dealing with skyrocketing public safety contributions under a 2010 state mandate.
The praise was followed by concern over the plan's reliance on the state's approval of a re-amortization of the police and firefighter fund contribution schedule. The city's proposal trims by $220 million the amount due next year to $328 million. If the changes don't receive final approval, the city will owe a full $550 million. The property tax increase raises $318 million in the first year.
The city's proposed changes would phase in over five years a shift to an actuarially required contribution level which under the state's 2010 mandate is supposed to take effect in 2016.
The city is under the gun on the first year's payment due in 2016 as the levy amount must be finalized by the end of 2015. It's unclear how Chicago would make the higher contribution if its revised payment schedule is ultimately rejected, a concern given state leaders' feud over a budget.
"In this scenario, the city's required pension contributions would increase ….putting even more stress on the city's budget," Standard & Poor's wrote.
The city's contributions to its four funds totals $978 million, a 78% increase from $550 million budgeted in 2015. Illustrating the poor condition of the city's four funds, the 2016 payments fall far short an ARC payment of $1.7 million, according to actuarial valuations in 2014.
The rating agency also expressed concerns over the long term impact of a looming Illinois Supreme Court ruling deciding the fate of the city's 2014 reforms to its laborers and municipal funds. The court will hear oral arguments in mid-November.
A lower court voided the changes, finding benefit cuts violated the state constitution.
If overturned, the city would see payments due next year fall by about $100 million but would need to come up with a plan to keep the funds solvent that doesn't rely on benefit cuts.
Such action would have "negative overall ramifications because it would set the stage for greater budgetary pressure in the medium to long term as pension plan assets are depleted," Standard & Poor's warned.
The report echoes the warnings of other buyside analysts that have praised Emanuel for showing the political will to raise taxes to tackle pension funding needs but cautioned against the portrayal of Wednesday's action as full fiscal fix.
Nuveen Asset Management in an October report says the budget "makes headway in confronting some of the pressing issues facing the city but does not completely shore up the city's finances, and leaves some questions unanswered."
The Nuveen report also takes the city to task on its budget numbers. The city has boasted that during Emanuel's tenure the structural deficit was cut to $233 million from $655 million in 2011.
"Chicago's true structural deficit exceeds $1 billion when the reported operating deficit is taken into account along with pension underfunding and expense deferral techniques such as scoop-and-toss debt restructurings," Nuveen wrote.
The city closed the 2016 $233 million gap with various non-property tax related fee and tax hikes and various management efficiencies.
