Chicago is not alone among major cities grappling with under-funded city employee pensions, but is clearly in the worst shape among the nation’s fifteen largest cities, a Wall Street rating agency concluded Wednesday.
Standard & Poor’s surveyed pension obligations in New York, Los Angeles, Chicago, Philadelphia, San Francisco, San Diego, San Jose, San Antonio, Phoenix, Jacksonville, Dallas, Houston, Columbus, Indianapolis and Austin.
Chicago performed the worst across the board — registering the highest annual debt, pension post-employment benefits costs as a percentage of governmental expenditures and the highest debt and pension liability per capita.
The burden in Chicago is $12,427-per-person, double New York city’s $6,115-per-person.
Chicago also had the lowest weighted pension fund ratio, the worst pension contribution vs. required level and the lowest funded return for a single fund.
That dubious distinction went to the Chicago Police Annuity and Benefit Fund, which had assets to cover just 25 percent of its liabilities in fiscal 2015, down from 26 percent the year before.
The report noted that the “median weighted pension funded ratio of 70 percent” for the 15 cities “underlies a wide range of positions with Chicago only 23 percent funded across all plans and Indianapolis the most well-funded at 98 percent.”
Chicago also had the lowest bond rating among the nation’s fifteen major cities, at BBB-plus with a stable outlook. Every other big city had at a bond rating of AA-minus or better. Austin, Columbus and San Antonio have a triple-A bond rating.
Given weak market returns in 2016, funded ratios reported in fiscal 2016 are likely to look worse for most cities, the report states.
“Pension liabilities are a clear credit weakness for Chicago, which stands out with the highest pension liability per capita and the lowest weighted funded ratio among peers,” the report states.
“Chicago’s combined debt service, required pension and actuarial [post-employment benefits] contributions represented the highest share of budget among the largest cities at 38 percent of total governmental fund expenditures in 2015. Of that amount, 26.2 percent represented required contributions to pension obligations.”
S&P noted that Chicago “only made 52 percent of its annual legally required pension contribution” in fiscal 2015.
While Mayor Rahm Emanuel’s 2017 budget contributes more toward employee pensions, amounts budgeted still fall significantly short of the actuarially determined contributions levels,” the report states.
The rating agency noted that dedicated funding sources have now been identified for all four city employee pension funds. But, Emanuel’s plan to save the municipal and laborers pension funds is still awaiting the governor’s signature.
The Illinois House unanimously approved the plan, only to have the governor declare his intention to veto the bill that locked in employee concessions and authorized a five-year ramp to actuarially required funding.
“Notably, the city is unable to change pension benefits for its existing employees due to state constitutional constraints, but has increased contribution requirements for new employees,” the report states.
The mayor’s office had no immediate reaction to the S&P report.
Last fall, Standard & Poor’s affirmed Chicago’s bond rating at three levels above “junk” status, but changed the city’s financial outlook from “negative” to “stable,” thanks to Emanuel’s plan to slap a 29.5 percent tax on water and sewer bills to save the largest of four city employee pension funds.
At the time, S&P said Chicago was “gradually moving in the right direction toward stabilizing its budget and pension plan contributions” and that the utility tax, “coupled with adjustments to benefits offered to new hires” were “tangible steps that forestall credit deterioration” in the near term.
“However, in order to ensure the long-term sustainability of its pension contributions and continued credit stability, we believe that the city will need to identify additional measures to address its mounting pension contributions within the next two years,” that report said.
Emanuel called the outlook upgrade a well-earned recognition of the work that he and the City Council have done to reduce the city’s structural deficit by “more than $600 million” while identifying permanent funding sources for all four city employee pension funds.
“Our hard work is now paying off. . . . It has stabilized the city’s finances,” he told the Chicago Sun-Times.
But, the mayor agreed with S&P that the job is not done.
He has openly acknowledged that the city’s largest pension fund would still be left with a gaping hole in 2023 — even after the utility tax is fully phased in. That hole will require “more revenue” to honor the city’s ironclad commitment to reach 90 percent funding over a 40-year period.
Chicago taxpayers have paid a heavy price for easing the city’s $30 billion pension crisis.
They’ve been hit with $838 million in property tax increases for police, fire and teacher pensions; a 29.5 percent tax on water and sewer bills to save the Municipal Employees pension fund and a 56 percent increase in the monthly tax tacked on to telephone bills — on cell phones and land lines — for the Laborers Pension fund.
Fitch has also shifted Chicago’s financial outlook from negative to stable earlier this year.