Chicago’s general obligation bond rating jumped two notches Monday, thanks to the progress Mayor Rahm Emanuel has made in reducing the city’s structural deficit and creating a “roadmap to pension fund solvency.”
The decision by Kroll Bond Rating agency to raise Chicago’s bond rating from BBB+ to A with a stable outlook could translate into savings for beleaguered Chicago taxpayers by reducing the interest rate the city will have to pay to borrow money.
In a 17-page report explaining the upgrade, Kroll credited Emanuel with identifying “permanent ramp-up revenue sources” for all four city employee pension funds. Kroll also cited “significant progress toward achieving structural balance through greater efficiencies and reduced reliance on non-recurring revenue sources.”
Chicago taxpayers have paid a heavy price for the solution to the city’s $36 billion pension crisis.
They have already endured $1.2 billion in property taxes for police, fire and teacher pensions; a 29.5 percent tax on water and sewer bills for the Municipal Employees Pension Fund, the largest of the four; and a pair of telephone tax increases for the Laborer’s pension fund.
More tax increases are on the way. By the city’s own estimates, police and fire pension costs will rise by $297.3 million or 36 percent in 2020. The Municipal and Laborers plan costs will grow by $330.4 million or 50 percent in 2022.
In outlining its “key rating concerns,” Kroll acknowledged the city’s heavy debt levels, rising public safety costs and the need to “identify funding sources once the interim period ends and full actuarial funding begins.”
The rating agency noted that the four pension funds are “severely under-funded” — with revenues to cover anywhere from 19 to 32 percent of liabilities — and that those ratios “will deteriorate before underfunded liabilities are stabilized and eventually reversed.”
But Kroll’s managing director Harvey Zachem said the mayor and City Council have already demonstrated the political will to confront the challenge.
“They did implement a very large, $543 million property tax levy increase and pretty substantial water and sewer usage tax increases also. We do see that as an indication of willingness to take on the 2020 and 2022 spikes,” Zachem said.
“If they were a non-home-rule unit, they’d be limited to mostly the property tax and they’d be capped…[But] they do have options with home-rule status. We would expect some combination of sources to be used.”
Managing director William Cox referred to the in-depth study Kroll published last summer about the city’s pension crisis.
It examined Chicago’s tax and wealth base and compared it to nearby suburbs and other large cities.
“We looked at the impact of various taxes, fees and charges and compared that to income levels of both households as well as size of businesses,” Cox said.
“Our conclusion was that Chicago, while it has a growing overall tax burden, that burden is still relatively modest compared to others in the suburban ring, as well as others across the country.”
Senior managing director Karen Daly added, “The wealth base can handle however the city administration chooses to pay for these obligations.”
For Emanuel, the report has political as well as financial benefits.
Last week, potential mayoral challenger Paul Vallas accused the mayor of “punting” Chicago’s $36 billion pension crisis during his first term in office, making the problem infinitely worse and wasting a golden opportunity to address the crisis when he had a Democratic governor and Democrats firmly in control of the Illinois House and Senate.
Vallas also questioned whether Chicago has the “financial infrastructure to sustain” Emanuel’s two-year police hiring surge. He noted that rookie salaries are low but rise fast.
That’s apparently why the mayor couldn’t resist crowing about the double-upgrade Monday while unveiling the CTA’s new, $203 million Wilson Station in Uptown.
Kroll “just upgraded Chicago to an investment grade and two notches [higher], which shows their confidence in the city’s public finances,” Emanuel said.
“It shows that all of the hard work we have done as a city of fixing our public finances — taking on the past challenges that were left to actually prepare for the future” has been worth it, Emanuel said.
“That’s a vote of confidence in the work that we have done. But it means we have more work ahead of us.”