CHICAGO – The weak status of most downstate Illinois and suburban Chicago public safety pension funds strain local governments statewide and pose a threat to credit quality, S&P Global Ratings warns.

On average, the 656 downstate and suburban firefighter and police funds are only 51% funded with 60% of municipalities strained by at least one pension plan below the 60% funded level, S&P writes in a report that reviewed pension data submitted by local governments for fiscal 2016 to the state Department of Insurance which had issued its biennial findings in October.

The state analysis reported that the combined shortfall for the funds of more than $9.9 billion had doubled from $4.8 billion a decade ago.

A road sign on the Illinois state border
An S&P Global Ratings report called out the weak status of most downstate Illinois and suburban Chicago public safety pension funds. Adobe Stock

The poor funding levels stem from weak statutory based funding requirements, contribution deferrals, and constitutional restrains on cutting liabilities through benefit cuts, S&P says.

"We have already observed pressure from rising pension costs for many of the issuers that we rate, as demonstrated by more frequent structural budget deficits, large tax hikes, and budget cuts that in many cases limit future operational flexibility, as well as reliance on reserves and other one-shot measures to address budgetary imbalance," wrote analyst Eric Harper.

"We expect that many of these financial pressures will worsen as accelerating pension costs comprise a greater share of municipal budgets, translating in many cases to greater fiscal volatility and generally weaker credit quality over time,” Harper wrote.


“We believe that the key to sustaining credit quality for issuers with poorly funded pensions is through strong funding discipline, as supported by the adoption of actuarial assumptions that are reasonable and likely to lessen pension payment acceleration,” the report says.

About 34% of municipalities’ contributions are materially below actuarially sound levels and rising payments are expected to absorb a larger share of Illinois municipal budgets over time that will require higher taxes or spending cuts or a combination to manage budgets.

The most at risk for credit damage are municipalities are those that carry an elevated debt burden in addition to a high pension burden, limited ability or political willingness to raise revenue or cut spending, and those with weak economic traits.

The funds’ health is hampered by state funding requirement that require a 90% funded ratio, instead of 100%, by 2040 and some are additional hurt by actuarial assumptions that fall short including a static mortality projections that may underestimate life expectancy and high payroll growth assumptions relative to inflation that might be overestimated.

Some make additional contributions that exceed the actuarial determined level and also use independent actuarial valuations by at least 34% make contributions that are materially below actuarially healthy levels, S&P says.

All Illinois governments have limited options given the state courts findings that benefits enjoy can’t be impaired under the state constitution’s pension clause. A proposed constitutional amendment that’s been pushed by some political leaders and civic groups to permit some relief can’t be counted on, S&P says.

“Such a measure would likely face significant impediments to passage, and in our view cannot be depended upon as a kind of panacea for those grappling with large pension burdens,” S&P writes.

Most municipalities manage their own public safety funds while their general employees participate in a statewide fund – the well-funded Illinois Municipal Retirement Fund.

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