Chicago’s New Pension Deal Is “Credit Negative”, Says Moody’s

Chicago’s new pension reform deal – which last week survived a Bruce Rauner veto – isn’t impressing Moody’s.

The deal gives the city a longer timeline to ramp up to making full payments to its Police and Fire pension fund. Chicago finance officials are wiping the sweat from their brows after the legislature overturned Rauner’s veto, because the savings from the bill has already been worked into the city’s 2016 budget.

Moody’s says the deal is a “credit negative” for the city, because it increases unfunded liabilities at the expense of smaller payments now.

From the Chicago Sun-Times:

“While the new law does provide short-term budget relief by reducing these pension plan contributions by $220 million, Chicago pension contributions will now fall far short of amounts needed to curb growth in its unfunded pension liabilities, a credit negative. By paying less now, Chicago risks having to pay much more later,” Moody’s wrote in its new Weekly Credit Outlook for Public Finance.

[…]

According to Moody’s, that means the city’s contributions to the two funds will be “insufficient to cover interest accruing on accumulated unfunded pension liabilities to continue growing.”

Based on current actuarial assumptions, Moody’s estimated that the unfunded liabilities of both plans will “now increase for almost 20 years, growing $3.3 billion over their reported year-end 2014 values.”

“If plan investment returns do not meet return assumptions, the risk of greater cost growth increases,” Moody’s said.

The report noted that 2015 investment returns for all four of the city’s pension funds “ranged from -1.5 percent to +1.8 percent.” That’s “far below assumed returns” of 7.5 to 8 percent.”

For anyone needing a refresher on the terms of the pension deal, here are the details via Reuters:

The measure alters a 2010 state law that boosted Chicago’s payments to its public safety workers’ pensions in order to reach a 90 percent funded level by 2040. Under that law, Chicago’s contribution will jump to nearly $834 million this year from $290.4 million in 2015, according to city figures.

The new law reduces the payment to $619 million and allows for smaller increases through 2020 than under the 2010 law. It also gives the police and fire funds until 2055 to become 90 percent funded. The police system is 26 percent funded and the fire system 23 percent funded.

Chicago’s fiscal 2016 budget assumed the bill’s enactment by lowering the city’s contribution to police and fire pensions by about $220 million.

 

Share This Post

Recent Articles

Leave a Reply

Privacy Policy | © 2017 Pension360 and © 2014 Policy Data Institute | Site Admin · Entries RSS ·