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

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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

Second Lawsuit Filed Against Chicago Pension Changes

chicago

A second lawsuit has been filed against Chicago, challenging the pension cuts passed by the state this year.

The pension changes raise contribution rates for employees and employers, and reduce COLAs. The changes apply to members of the Chicago Municipal Employees’ Annuity & Benefit Fund and Chicago Laborers’ Annuity & Benefit Fund.

From Reuters:

Litigation seeking to derail changes to Chicago public worker pensions on constitutional grounds ensnared a second city retirement system on Monday.

Attorney Clint Krislov said he filed a lawsuit in Cook County Circuit Court on behalf of members of the city’s pension fund for laborers. That lawsuit followed one filed Dec. 16 by a coalition of labor unions against Chicago’s municipal pension fund.

An Illinois law enacted earlier this year for the two funds requires higher worker contributions and limits cost-of-living increases for retirees. The lawsuits contend the law violates a prohibition in the Illinois Constitution against reducing public worker retirement benefits.

Cook County Associate Judge Rita Novak on Monday set a hearing on the unions’ motion for a temporary restraining order in the municipal fund case for Jan. 28 and 30.

[…]

Like Illinois, Chicago is arguing that its so-called police powers to provide essential services to residents trump constitutional protections for pensions.

[…]

Under the law that takes effect on Thursday, Chicago’s payments to its two funds increase over five years. Workers’ current contributions of 8.5 percent of earnings rise to 11 percent over five years. Instead of receiving an annual 3 percent cost-of-living increase, retirees will receive increases tied to inflation. The increases will be skipped in certain years.

Mayor Rahm Emanuel has warned that the funds face insolvency within nine to 17 years unless changes are made. The funding shortfall is $8.4 billion for the municipal system and $1 billion for the laborers system. Police and fire pensions were not affected by the law.

The Chicago Municipal Employees’ Annuity & Benefit Fund and Chicago Laborers’ Annuity & Benefit Fund manage a combined $6.7 billion in assets.

 

Photo by bitsorf via Flickr CC LIcense