CHICAGO – Chicago put on a "polished" show at its recent investors' conference, impressing with tours that highlighted public and private investment and Mayor Rahm Emanuel's announcement of a plan to rescue the largest of the city's four pension funds.
But several attendees said the smooth presentations didn't erase their worries about the city's pension liabilities or its ability to withstand an economic downturn.
"They are moving in the right direction, but there's still wood to chop," said one buyside analyst.
Several other analysts, who asked not to be identified, agreed, saying they left Wednesday's conference with the sense that the city had made good progress and shown the "political will" to act, but concerns run deep.
To stave off insolvency that looms in 2025 for its municipal employees' pension fund, Emanuel on Wednesday proposed levying a water and sewer tax based on water usage. Increases would be phased in over five years ,when it would generate $239 million more annually to help cover higher city contributions to the fund.
The city would also tap its general fund and the water/wastewater enterprise, whose employees are pension fund members. The city's water/sewer fees currently generate more than $1 billion after a series of rate increases, with future scheduled increases tied to inflation.
The city's aim is to reach a more actuarially based contribution by the end of the five-year ramp, similar to funding schemes adopted for the police and firefighters pension funds and one proposed for its laborers fund.
The end goal is to reach a 90% funded ratio in 40 years. New employees would pay more into the fund and employees hired since 2011 would have the option of contributing a higher amount in exchange for lowering their retirement age.
"It's not without burden, but I think it's a smart tax" to turn to, said Richard Ciccarone, president of Merritt Research Services.
"Overall, its hopeful, but it has to get passed and I don't know" if it will fully solve the municipal fund's needs, said the buyside analyst previously mentioned.
Trading on Chicago's tax-exempt general obligation bonds got a slight price bump after the pension announcement, with spreads on some paper narrowing slightly by 10 to 15 basis points over trading earlier in the week, according to ICE Data Services.
The city's spreads have ranged from about 250 basis points to 300 basis points over the last year fluctuating with headlines that have ranged from adverse court rulings to the city's passage of a record property tax hike.
Illinois Supreme Court rulings have severely limited the city's ability to cut benefits for current employees and retirees. The city has authority to levy the tax based on its home rule status, so no state legislative approval is needed, though the City Council must vote for the tax.
State approval is needed to alter the current funding scheme.
The recently announced laborers' pension plan relies on an already approved 9-1-1 surcharge.
The property tax hike will be used to help cover higher police and fire contributions.
"The mayor brought it home with evidence that the key to solving the city's fiscal problems is to maintain economic growth," said Ciccarone.
But only time will tell if the city's tax base will grow sufficiently to support and ease the impact of various tax hikes to shore up pensions. "If you don't get the growth then the burden of those taxes becomes more evident," Ciccarone said.
Emanuel's former chief financial officer Lois Scott launched the investors' conference after the mayor took office in 2011, but unlike past events, Emanuel made news with the announcement of the final pension fund overhaul.
It capped a week during which the city sought to highlight its dwindling structural deficit –down to $137 million from $654 million in 2011 -- heading into 2017 budget season.
Emanuel laid out his position with investors that the city has sought to tackle its fiscal ills in a way that wouldn't harm or "undermine the growth and job creation for the city," either through burdensome tax hikes or deep service cuts, and that, now, solutions are in place on pensions.
"Chicago was in a pension penalty box. It had not addressed its problems," Emanuel said. "Denial is not a long-term strategy, and for too long Chicago was operating where denial was the long-term strategy," Emanuel told the gathering of more than 200 that included a mix of investors, analysts, public finance bankers and financial advisors.
The city has now "met our challenges head-on and dealt with them" in a way that doesn't undermine the overall strategy, he added. Emanuel's address followed a morning of tours highlighting private and public investment and was followed by presentations from Chicago Public Schools and the Chicago Transit Authority.
Investors have long lamented the slow pace the city has taken in dealing with its pension quagmire that drove its fall to a junk rating from Moody's Investors Service.
The tax hikes late last year and this year followed Emanuel's re-election campaign in the spring of 2015 in which he highlighted the lack of any major tax increases, although he had raised water rates and other fees.
One buyside analyst said the city did a better job than in past years of providing data and being more straightforward with the state of its fiscal affairs and believes Emanuel's administration is "making a concerted effort to leave the city in better fiscal shape then when they came in."
Rating agencies have yet to weigh in on the newest pension proposal.
The city's GOs are rated Ba1 by Moody's and BBB-plus by Kroll Bond Rating Agency and S&P Global Ratings. Fitch Ratings has the city at the lowest investment grade level of BBB-minus.
All carry a negative outlook.
Moody's has been the most critical and suggested recently that the city's fixes for the public safety and laborers' funds only slow any worsening of their current funded ratios with improvement a long way off.
Emanuel on Thursday defended the decision to go with the water-sewer tax over other revenue sources, including some suggested by city council members.
The city ruled out going again to the property tax levy to raise revenue after the $543 million hike last year for the public safety funds.
The sales tax rate in the city is already 10.25% after a hike to cover Cook County pensions. Emanuel warned some proposals were not likely to satisfy rating agencies, such as a commuter tax that would require state approval, which could delay or block its implementation.
The city needed a tax that didn't allow "Springfield to be the determiner because the rating agencies won't give you that time," Emanuel said during a public appearance Thursday.
He also raised concerns that Gov. Bruce Rauner could oppose any new taxes amid ongoing partisan budget disputes.
"This is the fairest way to get it done," Emanuel said.
The municipal fund saw its unfunded liabilities rise by $2.5 billion in 2015 to $9.8 billion. They account for $18.6 billion of the city's $33.8 billion of net pension liabilities under new accounting rules. Under those rules, the four pension funds are collectively funded at just a 23% ratio.
