CHICAGO – Cook County's plan to veer from state law and make an actuarially based pension contribution offers a "novel approach" that could help shape public pension funding debate in Illinois, Fitch Ratings says.
The big question for Cook County and its board president, Toni Preckwinkle, is whether the plan can survive a legal test.
The alternative funding mechanism included in the 2016 budget adopted Wednesday "has the potential to advance the discussion on appropriate funding of public pensions in Illinois," Fitch said in a commentary piece Thursday.
"The county's pension strategy is notable, as it includes actuarially determined funding of the pension liability, but appears to ignore the restrictions imposed by the current pension statute, leaving the county vulnerable to potential litigation from taxpayers challenging the increased payments," Fitch wrote in the commentary.
Preckwinkle's administration sought to highlight what it considered the positives in the report.
"We appreciate that Fitch Ratings recognizes our efforts to help address the solvency of the Cook County Pension Fund," a statement read.
Fitch rates the county A-plus with a negative outlook that reflect concerns over the county's ability to tackle the $6.5 billion unfunded pension tab. Preckwinkle pushed for Cook County to come up with its own plan after a reform package that included cuts and higher contributions stalled in the General Assembly.
The Illinois Supreme Court tossed out an overhaul of the state's pension funds in May, finding the benefit cuts violated the state constitution. The justices are considering the fate of reform legislation to two of Chicago's four funds, which also included cuts.
The county's modified proposal dropped the benefit cuts but kept the shift to an actuarially required contribution. The county will make its regular payment based on the current statutory formula tied to a percentage of employee contributions and make a supplemental payment of $270 million in 2016 to meet the ARC and $340 million in 2017. The county anticipates future payments through 2046 will rise by 2%.
"Fitch occasionally sees local governments seeking to pay more than their legally required amount, but rarely significantly more, as Cook County is doing," Fitch said. "This plan, if it survives legal testing, could address those concerns; but if legal challenges invalidate it, the county will again become reliant upon state legislative action to improve pension funding."
The plan is being implemented under an intergovernmental agreement between the county and the pension fund. The county contracts to make payments on an actuarial basis, using a 30-year layered amortization structure, with future payments subject to annual appropriation by the county board.
The county's regular $195 million 2016 statutory payment comes from a property tax levy which is part of the county's state governing statutes, while the supplemental payments will come from a recently approved 1% sales tax hike.
The county's move could face two potential legal questions: whether it can contribute an amount above the statutory formula – a reason cited by Chicago for not raising contributions on its plans – and for its use of non-property tax revenue. The legislative package pending before state lawmakers would allow for the use of any funds and the shift to ARC funding, but it also includes benefit cuts which, if passed, would prompt a union lawsuit.
In its analysis of the county's budget, the Chicago Civic Federation wrote that it was "apprehensive" about the legality of dedicating the sales tax revenue to pension funding because of its governing statutes. "While the federation understands the county's rationale for increasing its pension payments, the ambiguity of how the sales tax increase will or can be used is less than ideal," the federation wrote.