CHICAGO – Chicago's restructuring of its public safety pension payments will initially drive up unfunded liabilities and cost the city more in the long run, Moody's Investors Service warned Friday.
The rating agency takes a dim view of Senate Bill 777, which gives the city more time to increase the funded ratio of its police and firefighter funds, labeling it a "credit negative" in its weekly outlook.
Moody's dropped Chicago to the junk level rating of Ba1 with a negative outlook in May 2015 in a move driven largely by the city's vast unfunded pension liabilities.
"The law relieves the city of immediate budget pressure by reducing current year statutory contributions by $220 million. However, Chicago's contributions will fall far short of amounts needed to curb growth in unfunded liabilities, an indicator of a structural deficit and a credit negative," Moody's wrote.
"By paying less now, Chicago risks having to pay much more later," the report said.
The city won legislative support for the proposed re-amortization as a means to ease the impact of a 2010 state mandate to begin making actuarially required contributions this year to get the funds to a 90% funded ratio in 2040.
SB777 phases in over the next few years the shift to an ARC and gives the city 15 more years to reach a 90% funded ratio.
Gov. Bruce Rauner vetoed the legislation last week, citing concerns similar to Moody's over the long-term cost burden being added to fund the plans. Lawmakers overrode the veto on Memorial Day.
If the override had failed, the city would have needed to contribute another $220 million this year, and $700 to $800 million more in the coming years. Mayor Rahm Emanuel last fall won city council approval to phase in a record $543 million annual property tax hike to cover the higher contributions but they reflected the deferred increases provided for by SB 777.
"Under the new law, Chicago's contributions will be insufficient to cover interest accruing on accumulated unfunded liabilities for many years, causing the plans' unfunded positions to continue to grow," Moody's said in the commentary authored by Matthew Butler and Rachel Cortez. The unfunded liabilities are expected to grow a total of $3.3 billion from 2014 levels for the first 20 years of the plan.
That means steady future growth in city ARC payments. If plan investments don't meet assumed rates of 7.5% to 8%, payments could grow even more. The city's pension funds saw return rates of negative 1.5% to a positive 1.8% in 2015, Moody's said. The city's four funds, which have a collective $20 billion to $23 billion tab of unfunded obligations, smooth return results over five years.
"Further adverse investment performance would increase the city's pension payments over current projections, creating additional operating stress and forcing the city to make difficult budgetary decisions," Moody's said.
Moody's also remains concerned over how the city will solve the problems of its other two plans, which cover laborers and municipal employees, after the city's first stab at reforms was tossed by the Illinois Supreme Court last March.
Emanuel announced a plan late last month negotiated with unions in the laborers' plan to make higher contributions using proceeds of an emergency telephone surcharge and having new employees contribute more, while offering some existing employees a lower retirement age in exchange for higher contributions.
The administration has yet to reach an agreement with unions representing employees in the much larger municipal employees' fund or to identify a revenue stream to fund higher payments. Both would require state legislative approval to change funding plans.
"In addition, Chicago Public Schools could require its own tax increase to address ongoing fiscal stress," Moody's noted. The also junk-rated district is grappling with a $1.1 billion deficit driven in part by rising pension contributions.
Moody's report came one day after S&P Global Ratings warned that the city's general obligation rating will remain on shaky ground until its resolves the looming insolvency of the laborers' and municipal employees pension funds.
S&P rates the city's GOs BBB-plus with a negative outlook. Kroll Bond Rating Agency also rates Chicago BBB-plus with a negative outlook and Fitch Ratings assigns it a BBB-minus rating and negative outlook.
