Tag: credit rating

Chicago Could See Credit Downgrade If Pension Changes Are Suspended Pending Lawsuit

chicago

Unions and retirees are currently challenging Chicago’s 2014 pension changes, and they are asking a judge to stop the implementation of the changes – which took effect Jan. 1 – until the lawsuit is resolved.

But a Chicago official said on Thursday that such an injunction could spur a credit rating downgrade from all three major rating agencies.

From Reuters:

Chief Financial Officer Lois Scott testified in Cook County Circuit Court that all three major credit ratings agencies have negative outlooks on Chicago’s ratings, largely due to a big unfunded pension liability that a 2014 Illinois law aims to ease for the city’s municipal and laborers’ funds.

Labor unions and retirees who are challenging the law, which took effect Jan. 1, have asked Associate Judge Rita Novak to temporarily stop it.

“I think that anything that arrests progress significantly increases our risk of downgrades,” Scott testified.

Scott said Chicago’s ratings are already lower than most big U.S. cities and that further downgrades would pump up interest rates on new fixed-rate bonds and thin the ranks of potential bond buyers and credit providers. She added the termination of interest-rate hedges and letters of credit on existing variable-rate bonds could be triggered, costing Chicago hundreds of millions of dollars.

The 2014 pension changes require city employees to contribute more to the system. The city’s contribution rate was increased, as well. Lastly, the calculation of COLAs is now linked to inflation; previously, the COLA was set at 3 percent annually.

 

Photo by bitsorf via Flickr CC LIcense

Texas Pension Official Calls For Better Funding, Offers Options to Lawmakers

Texas

The executive director of Texas’ Employee Retirement System testified in front of the state Senate Finance Committee.

Executive Director Ann Bishop used the opportunity to call for measures to improve the system’s funding, and warn that credit downgrades could be coming sooner than later if lawmakers stand pat.

Bishop offered lawmakers some options for improving the funding of the system, including a higher contribution from the state.

From Your Houston News:

Bishop said that the problem is not imminent, but every year the Legislature does not fund ERS to actuarial soundness, that is, the ability to meet its obligations over the next 31 years, the annual debt for that fund increases by half a billion dollars.

“If this is not addressed one way or another, the debt is going to keep growing,” she said. “The bond houses do consider this a debt.”

Her agency is asking for an increase in the state contribution rate to employee retirement from the current 7.5 percent to nearly 12 percent. This would allow the agency to begin paying down the debt accrued in the retirement fund.

Bishop offered some other ways to reach actuarial soundness aside from only increasing state funding. One way is to grandfather fewer people when making benefits and contribution changes.

Another is to increase employee contribution rates, for example by increasing the state contribution half a percent to an eight percent and increasing the member contribution rate from 6.6 percent to eight percent, the fund would just meet actuarial soundness criteria over 29 years.

Legally, the state’s pension contribution rate is capped at 10 percent; Bishop’s proposal of almost 12 percent would exceed that cap.

Illinois Pensions Get $50 Million From S&P Settlement

Illinois

Credit ratings agency Standards & Poor’s announced a $1.375 billion settlement with 18 states today over the alleged inflated ratings it gave mortgage-backed securities which eventually turned toxic.

Illinois will receive a $52.5 million chunk of that settlement – with most of the money going towards its pension systems.

More from the Chicago Sun-Times:

It won’t solve Illinois’ pension crisis — not by a long shot — but it’s “better than nothing,” state Attorney General Lisa Madigan said Tuesday, announcing a $52.5 million settlement connected to the 2008 economic collapse.

[…]

Madigan’s office sued S&P in 2012, alleging the credit ratings agency “compromised its independence as a ratings agency by doling out high ratings to unworthy, risky investments to increase its profits, while its misrepresentations spurred investors, including Illinois’ pension funds, to purchase securities that were far riskier than their ratings indicated.”

“S&P abandoned its critical role in the years leading up to the economic crisis, blinded by its unyielding desire for profits,” Madigan said during a news conference Tuesday morning at the Thompson Center in the Loop.

The majority of the state’s portion will be reinvested in Illinois’ pension systems, Madigan said. To date, the state has recovered approximately $400 million for losses the state pension systems sustained after investing in mortgage-backed securities, Madigan said.

Though Madigan acknowledged the latest settlement will have little impact on the state’s pension mess, she said it nevertheless sends a message.

The Justice Department statement on the settlement, which includes a list of the states receiving money, can be read here.

Texas Pension Official: Liabilities Could Hurt State Credit Rating Sooner Than Later

Texas sign

Texas budget analysts and pension officials are attempting to draw lawmakers’ attention to the unfunded liabilities of the Employee Retirement System of Texas. The analysts and the director of the pension system say the liabilities, if left unaddressed, could lead to a credit downgrade for the state.

From the Austin American-Statesman:

At a legislative hearing this month, outgoing Employee Retirement System Executive Director Ann Bishop piqued lawmakers’ interest when she said the plan’s current unfunded balance of $7.5 billion could at some point affect the state’s good credit rating if the Legislature doesn’t devise a plan to pay it off. The 2016 onset of new accounting rules will double that risk, she noted. The state only has 77 cents for every dollar needed to pay future benefits, according to the retirement system. If not addressed during next year’s legislative session, it is projected to grow to nearly $10 billion by 2018.

The agency again has asked the state for additional funding to make the plan actuarially sound – so that contributions and investment returns cover expenses and payouts – which it has not been since 2003. That would require an additional $350 million every two years.

Absent that, Bishop told members of the Senate State Affairs Committee that the solution is some combination of more benefit cuts or increased contributions from both the state and employees. Lawmakers in 2009 and 2013 increased state and employee contributions and cut benefits for newly hired workers.

While that “has done a lot to help close the gap,” Bishop said “it isn’t enough.”

“It will have to be fixed. And it’s just going to get worse before it gets better,” she told the committee, noting the plan will run out of money to pay for promised pension benefits by the 2050s if nothing changes.

That “sounds like a long time from now,” she continued, but “when you’re talking about attracting people into the workforce and you’re telling them they’re going to pay into a fund for 30 years and not have it in their retirement, that’s not much of a benefit.”

She also warned that further diminishing the plan could inspire a lawsuit or – even worse – spark a mass retirement exodus as more than a third of the state’s workforce is either already eligible to retire or will become so in the next five years. In 2013, retirees received an average annuity of $18,946 from the plan.

ERS Texas manages $25.6 billion in assets.