CHICAGO – Chicago's efforts to repair its pensions remain far short of stabilizing the retirement systems, though the city is far from the brink of fiscal collapse, Moody's Investors Service analyst Naomi Richman said Monday.
Richman, co-manager of Moody's local government group, was speaking at a panel discussion here that posed the question: "Are We On The Brink?"
"Time is not about to run out for Chicago. The city clearly doesn't have forever but there is still time we think to make policy changes to avoid a full-blown financial crisis," Richman said, measuring the timeframe for needed improvement in years, but not decades.
"While Chicago's challenges are very real, very serious, and if the pension problem is never addressed you could ultimately get to that brink, we are not there quite now," she said.
Moody's dropped the city to junk in May 2015 after the Illinois Supreme Court voided state pension reforms in an action that made clear the city's proposed reforms faced an uphill battle.
Some praise was offered to Mayor Rahm Emanuel's administration for taking steps to negotiate pension reforms and in the aftermath of negative court decisions to enact a record $543 million annual property tax hike.
"They are showing a willingness to begin to address that problem and those are positive signs as opposed to a situation where elected officials would have their head in the sand," Richman said during the discussion, hosted by the City Club of Chicago.
Still, the fixes only go so far. The property tax hike to cover higher police and firefighter fund payments and a plan to cover higher payments to the city's laborers' fund with 9-1-1 surcharge revenue represent strides, but they fall short as they simply reduce the growth in unfunded liabilities. The plans phase in a shift to an actuarially required contribution to shore up the funds. Another $1 billion would be needed to fund its pensions at an ARC level.
Several unknowns could pose further strains on Chicago's balance sheet. The city's police department is the subject of federal investigation that could result in costly consent agreement demands.
The state's own massive financial problems and political dysfunction mean Chicago can't expect much help from Springfield.
"The state is in horrible financial shape" and that's "having a tremendously negative impact on the city of Chicago and Chicago Public Schools," said Chicago Civic Federation president Laurence Msall, who served as moderator.
The state's stopgap budget strips $100 million from personal property tax replacement taxes that go to local governments.
For Chicago Public Schools, part of its nearly $600 million funding package approved by state lawmakers relies on General Assembly agreement on pension reforms early next year.
Richman warned that faltering investment returns could further set back efforts to improve the funded rations of Chicago's pension plans.
The city has also not yet announced a plan to rescue its fourth fund, which covers general municipal employees. Like the laborers' fund, it's headed toward insolvency in the next decade. The recently announced laborers plan and yet-to-be announced municipal plan must still be approved by the General Assembly.
The city has more than $20 billion of unfunded liabilities and $9 billion of general obligation debt.
Chicago carries the highest unfunded liabilities of nearly 8,500 local government credits rated by Moody's and those levels equate to nine times the city's operating revenue compared to an average among other credits of 2.4 times.
On the flipside, the city isn't rated lower because its fiscal woes are not as acute as those that drove Detroit into its 2013 bankruptcy as it struggled with a dwindling tax base and inability to pay its bills. Richman described Atlantic City, which has struggled with the loss of casinos that represent its primary revenue source, as a city that could be described as being "on the brink."
Longtime Chicago Sun-Times City Hall reporter Fran Spielman said the city needs a new revenue source to deal with its fiscal strains.
A commuter tax or income tax have been talked about as options. "Some new source" is needed, she said.
The sales tax is considered off the table because Cook County has raised its share to deal with its own pension mess, pushing the rate into double digits. The local property tax also faces a further hike after the General Assembly's recent approval of a $250 million increase – supported by Emanuel – to help deal with the Chicago Public Schools' $1 billion deficit.
For all of the city government's financial challenges, the school district's weigh more heavily in the near-term.
"The schools have an immediate liquidity problem," Richman said. The district will release its fiscal 2017 budget next month and rating agencies are watching closely to see "what assumptions they make" in how they plan to achieve what district officials have said would be a balanced budget.
"I think the next few months will be really critical," Richman said, because the district needs to strike new credit line agreements to replace $900 million of expiring lines.
Spielman laid much of the blame for the city's fiscal "mess" on the administration of former Mayor Richard Daley and his two decades in office where the property tax levy was considered off limits in all but a few post-election years.
"That is absurd," she said, suggesting hikes should be more frequent and perhaps tied to inflation.
Spielman doesn't envision Emanuel allowing either the city or the more acutely troubled Chicago Public Schools to land in bankruptcy because it's "such a black mark" that would damage the city's reputation. She believes even larger tax hikes would be pushed through to avert bankruptcy.
Chicago Tribune political columnist and former city hall beat reporter John Kass, who sat on the panel, took a more dire tone as he sees a lack of political will at the city and state level to fully solve the city's fiscal ills.
"Chicago is Detroit before Detroit really became Detroit," Kass said. "If things don't change and there's aren't really good hard decisions made I don't see a way out of it….politically there is not the will to do what has to be done."
He suggested more spending cuts were needed and CPS should already have been taken into bankruptcy earlier.
