Moody’s: Chicago’s Pension Contributions “Insufficient”; Upcoming Supreme Court Ruling Key to City’s Pension Funding, Credit Outlook

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Moody’s released a report on Tuesday that analyzed Chicago’s possible paths to pension funding, and the various scenarios the city could face in the wake of a favorable (or unfavorable) ruling on its pension reforms from the state Supreme Court.

The report notes that Chicago’s statutory pension contributions are “insufficient” for heading off the growth of unfunded liabilities, and that unfunded liabilities are likely to continue to grow for at least 10 years.

But in the end, the crux of every scenario, and to the city’s credit outlook, is how the state Supreme Court rules on the city’s pension reforms, according to the report.

From Moody’s:

The scenario that Moody’s views as having the most positive credit impact for Chicago consists of a favorable Illinois Supreme Court decision, as the city’s budget assumes, but state legislative action that does not conform to the city’s adopted plan. Senate Bill 777 has been passed by the Illinois General Assembly, but requires the governor’s approval to become law. The bill lowers Chicago’s current statutory public safety pension contributions relative to existing statute, granting the city more time to meet statutory funding targets. Without Senate Bill 777, the city’s 2016 statutory pension contribution will be much higher than the city has budgeted.

“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 AVP-Analyst Matthew] Butler says.

The city’s adopted budget assumes the governor signs Senate Bill 777 and the Illinois Supreme Court reinstates PA 98-0641, the latter of which would preserve benefit reform of Municipal and Laborer pensions and reduce the plans’ risk of insolvency. While the adopted budget notably increases the city’s pension contributions relative to prior years, the amounts contributed under these assumptions could enable unfunded pension liabilities to grow for up to 20 years.

Two other scenarios assume an unfavorable ruling from the Illinois Supreme Court, which would raise the possibility of substantial cost growth for the city over the next decade, with or without Senate Bill 777.

“This would exert additional negative credit pressure on Chicago’s credit quality because it would likely remove all flexibility to reduce unfunded liabilities through benefit reform and raise the probability of plan insolvency,” Butler says.

Moody’s subscribers can access the report, “Chicago’s Pension Roadmap: A Scenario Analysis”, here.

 

Photo by bitsorf via Flickr CC License

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