CHICAGO - Chicago's plan to overhaul two of its four pension funds removes the threat of their looming insolvency but any notable reduction in the burdensome size of their liabilities is years off, Fitch Ratings said.
Fitch published the brief special commentary Wednesday, one day after the Illinois General Assembly approved legislation overhauling the city's laborers' and municipal funds. It calls for higher city and employee contributions and some benefit cuts, including a reduction in existing annual cost-of-living increases.
The plan "would eliminate the threat of pension insolvency facing two of the city's four plans," Fitch wrote. "However, long-term pension fund sustainability is many years away Fitch believes it will be many years before meaningful reduction in the unfunded liability is evident."
The rating agency also underscored the risk of "protracted ligation" given the strong legal protections afforded pension benefits under the Illinois constitution. The city plan was crafted after negotiations with labor groups and most impacted by the changes agreed to remain neutral on the package. Several unions, however, are opposed and have urged Gov. Pat Quinn to veto the bill. Quinn has not yet taken a position.
The city proposal calls for a five-year ramp up period in contributions to 2020 when payments would reach an actuarially required contribution level that puts the funds on course to a 90% funded ratio in 40 years. Fitch said the closed amortization is a positive, but labeled the city's proposed ARC structure a "weak funding standard" given the ramp up period and warned that it puts off any significant progress in reducing the unfunded liabilities.
The city is carrying $19.5 billion of unfunded obligations in its four pension funds for a collective funded ratio of 35%. Fitch said it considers funding levels below 70 % to be weak. The municipal fund is 38% funded with $8.4 billion of unfunded obligations, and on a track to insolvency between 2023 and 2027. The smaller Laborers' Fund is 58% funded with $1 billion in unfunded obligations and on pace for insolvency between 2024 and 2031.
The additional city contributions also pose a challenge. A mandate that 50% of Chicago's increased funding come from property tax hikes was stripped from the original bill due to legislative opposition, but the city is still expected to rely heavily on property taxes for the funding. The City Council will now have to approve the increases. The city's original plan relied on a $250 million property tax increase phased in over five years. It would raise $750 million.
"Increasing pension costs are a recurring theme among Chicago area governments and funding these increases will likely place a considerable stacked burden on the area's resource base," Fitch said. "These increases will occur in the context of other steeply rising costs, including a statutorily required $600 million increase in contributions for the city's other two pension systems."
The city is expected to seek separate legislation delaying the $600 million spike in funding for its police and fire funds under a prior state mandate and is also expected seek an overhaul of benefits. The police fund carries $6.9 billion of unfunded obligations and the fire fund $3.1 billion. Chicago Public Schools' teachers' pension fund is also in need of a fix. It has $6.8 billion of unfunded liabilities for a funded ratio of 59.9%.
Quinn on Wednesday again refused to take a position on the bill. “I was pleased that the General Assembly removed any language about a property tax levy, or a mandate,” he said during an unrelated event when questioned on whether he would sign the legislation. “I’m going to take a hard look at [it] .it’s going to a little while. It’s a pretty complicated bill.”
