Moody’s warns: City’s unfunded pension liabilities to grow for 10 years, maybe longer

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Chicago’s unfunded pension liabilities will continue to grow for at least another decade, maybe longer, even after Mayor Rahm Emanuel pushed through a $543 million property tax increase devoted exclusively to police and fire pensions, a Wall Street rating agency concluded Tuesday.

Six months ago, Moody’s Investors Service infuriated Emanuel by dropping Chicago’s bond rating two notches to a junk status shared only by Detroit among major cities.

The double-drop was Moody’s response to an Illinois Supreme Court decision that overturned state pension reforms, placing Emanuel’s plan to save two of four city employee pension funds in similar jeopardy and making it far more difficult for the mayor to extract pension reforms from police and fire unions.

A Circuit Court judge subsequently validated Moody’s concerns by overturning the mayor’s plan to increase employee contributions by 29 percent, reduce employee benefits and end compounded cost-of-living adjustments for retirees who draw their benefits from the Municipal Employees and Laborers pension funds. The city appealed the case to the Illinois Supreme Court. A hearing is scheduled for next week.

On Tuesday, Moody’s released a new report that examines four different scenarios centered around the risky assumptions built into the mayor’s 2016 budget.

The first assumes that the mayor’s old friend, Republican Gov. Bruce Rauner, will sign legislation approved by the Illinois House and Senate — but not yet on the governor’s desk — giving Chicago 15 more years to ramp up to a 90-percent funding level for the police and fire pension funds. If he doesn’t, the mayor’s tax-laden budget comes up $220 million short for 2015 alone.

The second assumes that the Illinois Supreme Court will uphold the Municipal and Laborers reforms.

Never mind that Circuit Court Judge Rita Novak cited the “crystal-clear direction” provided by the Illinois Supreme Court’s reading of the Illinois Constitution. If, as expected, the Supreme Court overturns those reforms, the city’s budget picture would get $130 million better in the short-run and hundreds of millions of dollars worse over time.

Moody’s concluded that the scenario that would have the “most positive credit impact” for Chicago would be a favorable Illinois Supreme Court ruling and a thumbs-down from Rauner on the police and fire pension bill.

That’s because it would require Chicago taxpayers to cough up even more money sooner for police and fire pensions.

“This scenario is the most credit-positive over the long-term. Although it would require larger pension contributions than currently budgeted, the higher payments would achieve the slowest and least extensive growth in unfunded liabilities among the four scenarios,” Moody’s analyst Matthew Butler was quoted as saying.

“Lower amounts contributed to the pension funds result in lower values of assets on which investment returns can be earned. For this reason, there is a direct causal relationship between contributions and unfunded liabilities.”

Still, Butler acknowledged that it will be awfully tough for Emanuel to ask even more from Chicago taxpayers after lowering the boom — to the tune of $720.7 million in taxes and fees.

“Given the significant adjustments already included in the adopted budget, implementation of additional adjustments, such as a further tax increase or deeper expenditure reductions, could present challenges,” Butler wrote.

“The city’s options include borrowing for the higher pension payment or paying the higher cost out of existing reserves, though those actions could more negatively inform our credit assessment within this scenario.”

The worst-case scenario, according to Moody’s, would occur if Rauner signs the police and fire pension bill while the Illinois Supreme Court overturns the Municipal and Laborers reforms.

“Chicago’s statutory Municipal and Laborer contributions would be lower than budgeted, providing immediate budgetary relief. However, payments to the public safety plans, as budgeted, would enable more rapid growth in those plans’ unfunded liabilities, resulting in the most extensive growth of aggregate unfunded liabilities month the four scenarios,” the report states.

The mayor’s office took the Moody’s warning in stride.

“Mayor Emanuel is committed to ensuring that City employees and retirees have a pension to turn to,” a statement issued by the mayor’s office said.

“Both [the police and fire and municipal and laborer reforms] were passed after successful discussions with the impacted unions, securing the retirements of our employees and retirees without burdening taxpayers with unsustainable pension contributions. These pension reform plans are sensible and represent a shared path forward in addressing the pension challenges that threaten Chicago’s future, while reducing the impact on taxpayers …”

The Illinois Supreme Court is widely-expected to overturn the city pension reforms for the same reason cited in the state pension case:  Membership in a government employee pension system “shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” Anything less than a clearcut victory for city retirees would be a huge surprise.

But, without the savings generated by the reforms, Chicago’s statutory contributions would remain “very low relative to actuarial requirements,” putting the funds on a path to deplete assets in “as few as 10 and 13 years, respectively.”

“Upon insolvency of the Municipal and Laborer plans, it is presently unclear whether or not Chicago would have to assume responsibility for funding benefit plans on a pay-go basis. If it did, Chicago’s total pension payments would increase significantly in 2026 following the Municipal plan’s depletion of all assets,” the report states.

Moody’s goes on to resurrect concerns that virtually guarantee that it will take years for Chicago to shed the junk bond rating that has already saddled taxpayers with tens of millions in penalties and higher interest rates.

Chicago’s “direct debt” is 2.2 times fiscal 2014 operating revenue, nearly twice as high as other major cities. The city lost nearly seven percent of its population between 2000 and 2010 with only a “modest one percent” growth in 2014.

And since the 2007-to-2009 recession, the gross domestic product of the Chicago area is up by just 9 percent. That’s compared to 34 percent and 24 percent respectively after the 1982 and 1991 recessions.

“While Chicago’s financial reserves remain in good shape, they have been retained at the expense of insufficiently funding pensions,” the report states.

Moody’s noted that the city closed fiscal 2014 with an available operating fund balance of $790 million or 17 percent. That includes reserves in the city’s general and debt service funds, as well as remaining proceeds from the Chicago Skyway and parking meter leases.

“However, the difference between Chicago’s 2015 budgeted pension contribution [paid in 2016] and our calculated `tread water’ cost under the adopted budget scenario is $780 million. Bridging this gap in 2016 alone would exhaust the city’s operating reserves,” the report states.

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