Chicago is the most prominent of many Illinois municipalities to receive Moody's downgrades because of pension underfunding.

CHICAGO — Moody's Investors Service has hit well over a dozen Illinois municipal credits — led by Chicago and Cook County — with single and multiple notch downgrades over the last year primarily due to the strains of their unfunded pension liabilities.

Their credit deterioration stems from Moody's revised local government rating criteria that increased the weight of pension burdens. The number of downgrades highlights the severe strains faced by some Illinois local governments and underscores the need for local government reforms, analysts said.

Moody's downgraded Chicago three notches last summer and another notch earlier this year. It retains a negative outlook at the Baa1 level.

Several of the city's sister agencies, including the school district and park district, also have taken a hit. Moody's dropped Cook County one level last year and assigned a negative outlook. The suburbs of Elk Grove Village and Evanston lost their top Aaa marks, and the state's third largest city, Rockford, was dropped from the double-A category.

Given local governments' struggles to solve their pension funding problems, more concern was sparked by the Illinois Supreme Court's recent decision extending the state constitution's strong protections of pension benefits to retiree healthcare benefits.

Commentary on the ruling has centered on what it means for an overhaul to state pensions that passed in December and is facing litigation challenging its constitutionality.

The state Supreme Court earlier this month ruled only that retiree healthcare premium subsidies are covered by the constitution's pension clause that protects benefits from impairment or diminishment. A circuit court now must hear arguments on whether those benefits have been impaired.

The validity of pension reforms passed so far has yet to be decided at any court level but many view the retiree healthcare ruling as an ominous sign for the state overhaul as well as legislation overhauling two of Chicago's four pension funds.

Moody's analyst Tom Aaron said in a recent commentary that the decision "casts doubt" on recent local and state pension reform efforts and poses a "credit negative for Illinois and local governments such as the City of Chicago."

"The majority of the justices expressed views that run counter to the rationale used in recent pension reform legislation for certain city and state plans," Moody's wrote.

Most analysts, lawmakers, city officials, and watchdog groups believe the most sound pension fixes must include a mix of increased revenue and benefit cuts, and the ruling heightens concerns that any cuts could eventually be overturned.

Richard Ciccarone, president of Merritt Research Services, cautioned that concern over the court ruling shouldn't impede a sweeping local government reform fix and that different legal arguments will be at play should changes face a challenge.

"There's no question of the need for relief at the local governmental level," Ciccarone said.

Many with funded ratios below 60 % "face an upward battle to prevent escalating pension costs from eroding their budget flexibility," he said.

The struggle is particularly harsh for non-home rule communities with flat and declining assessed valuations. "I think they've got to have action one way or another," he said.

Outside of Chicago and Cook County, most local governments' general employees participate in the Illinois Municipal Retirement Fund.

That fund remains in fairly healthy condition; its unfunded obligations fell to $5.11 billion from $5.25 billion in fiscal 2012 with its funded ratio rising to 84.3% from 83%.

The acute struggle is for local governments with their own municipal employee funds and local governments who remain responsible for their public safety workers. The public safety pension issue is pressing, because a legislative mandate to shore up those funds across the state takes effect next year with a spike in contributions expected to tax governments' coffers. Chicago faces a $600 million increase next year under the mandate.

A coalition of more than two dozen suburban and downstate mayors this spring pressed lawmakers to scale back pension benefits for public safety workers, warning that the escalating costs are pushing them toward financial ruin.

The coalition argued that without change they won't be able to maintain adequate levels of essential services like police and fire. The woes of some local governments differ from the city and state, depending on their status as home rule or non-home rule with limited revenue raising options. Some thought they were funding their pensions at healthy actuarially based levels but they faltered on their investment return rate and other assumptions, Ciccarone said.

Sweeping legislation to address local government demands never surfaced. Chicago did win approval for its overhaul of its municipal and laborers' funds. Cook County floated its own reform package but it died in the House.

Illinois Gov. Pat Quinn in April raised the idea of sharing more state income tax revenue with local governments to stabilize their local pension systems without relying too heavily on the property tax levy as he sought to raise legislative support for making an expiring income tax permanent. Lawmakers did not pass a tax extension but are expected to revisit the subject after the November election.

With two of the three ratings agencies maintaining a negative outlook on Cook County, board President Toni Preckwinkle had repeatedly warned that a downgrade was likely without some type of pension reform. It came last week when Fitch Ratings lowered its rating to A-plus. Moody's downgraded the county last August to A2 from Aa3, warning of more possible credit deterioration by keeping it on negative outlook.

The county's unfunded liabilities totaled $5.3 billion at the end of 2013 for a funded ratio of 61.5%, up from a ratio of 58.5% in 2012. Moody's last August also downgraded the county's forest district because of growing pension liabilities, dropping its rating to A1 from Aa2.

Chicago's Baa1 rating carries a negative outlook. Rating agencies have said the passage of legislation calling for higher contributions and reduced benefits for two non-public safety funds is a positive, although the improvement in funded ratios will be slow. The city collectively carries $19.5 billion in unfunded obligations.

Pension woes have caused at least two Chicago suburbs to lose prized triple-A ratings. Moody's and Fitch both downgraded Evanston last year due to its pension burden, and Moody's also stripped the village of Elk Grove of its Aaa rating.

Moody's dropped Evanston to Aa1 from Aaa while noting that local officials have repeatedly attempted to address the underfunded pension funds. The reported unfunded liability totals nearly $171 million, or $260 million under Moody's adjusted pension liability methodology.

"Pension liabilities are a source of budgetary pressure for the city," Moody's said. "Management has expressed a commitment to continue their efforts to address the city's sizable pension liabilities."

Moody's said its downgrade in April of Rockford's GO credit to A1 from Aa3 reflects "the city's limited revenue raising flexibility due to its lack of home rule status and its elevated debt and pension burden."

Moody's in June cut its issuer rating on the Chicago suburb of North Riverside by three notches to Baa2 from A2 and assigned a negative outlook. It also downgraded the village of Oak Lawn to A2 from A1 and maintained the negative outlook.

Elevated unfunded pension liabilities are to mostly to blame in both cases, analysts said. Both governments face statutory requirements that require them to increase their contributions starting in fiscal 2016 or they could lose their state share revenues.

Suburban Melrose Park was cut two notches to Baa2 last year. The Lemont Fire Protection District, Lisle-Woodridge Fire Protection District, North Riverside, Oak Lawn, Peoria, and Rosemont also have been lowered due in large part to their pension woes.

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