CHICAGO – Illinois Gov. Bruce Rauner's veto of Chicago's pension overhaul doesn't pose an imminent threat to the city's credit, S&P Global Ratings said Tuesday.
"While the governor's veto itself, in our view, does not create immediate credit pressure, it does present additional uncertainty as to whether the city will be able to adequately address its pension challenges in the near term," S&P wrote.
The special commentary addressed Rauner's Friday veto of the legislation designed to stave off insolvency for two of the city's four pension funds covering laborers and general municipal employees by raising contributions and trimming benefits for new employees.
Senate Bill 2437 is now dead because it was approved by a prior legislature. In anticipation of a possible veto due to the partisan political gridlock that's driving a nearly 22-month-old state budget impasse, Democrats introduced an identical bill after the new legislature was seated in January. The Senate approved Senate Bill 14 in a 38-to-11 vote on Jan. 25.
The bill is set for a House committee hearing on Thursday and could be voted on next week.
Rauner called the legislation a bad deal for taxpayers saying it lacked sufficient reforms and would further drive up taxes in the coming years when actuarially based contributions take effect in 2023. He called for city pension reforms to be part of a larger statewide package although such a plan has not been proposed.
"The governor's veto creates another roadblock for the city, but, in our view, timely action to prevent plan insolvency remains possible," S&P wrote. "Given the legislative support for Senate Bill 2437, we expect that the reintroduced bill would likely receive sufficient votes to override a potential governor's veto."
Increased funding relies on a water-sewer tax for the municipal fund and an emergency line surcharge for the laborers fund. The city is setting aside the revenues to put toward the pension funds once the bill becomes law.
"Timely action on pension funding is crucial to the city's budgetary stability" because the funds are headed toward insolvency between 2025 and 2027, S&P wrote.
"Though unlikely, in our view, potential delays to increased contributions beyond 2017 could lead to credit deterioration," S&P wrote.
S&P shifted the city's outlook to stable from negative on its BBB-plus rating last year after the City Council adopted the water-sewer charge even though analysts – like other critics – consider the plan flawed for "falling short of ensuring long-term sustainability of the plans," S&P wrote.
Analysts remain concerned about the lack of a plan to address funding increases needed in 2023 and the limited cushion available to keep on track should various assumptions, like investment returns, fall short.
"Despite these risks, we anticipate that the city will still take tangible steps to address near-term pension pressures, but in the absence of additional measures to ensure the affordability of the contributions and the sustainability of the plan, credit stability could be short-lived," analysts wrote.