Credit rating agency Moody’s hit Chicago with a credit downgrade on Friday, cutting the city’s rating to Baa2 – two steps above junk bond status.
Notably, Moody’s indicated that the city could face future downgrades even if its 2014 pension reforms withstand legal challenges.
Pension360 has covered the city’s ballooning pension payments, which could exceed $1.5 billion annually by 2019.
More on the downgrade from Bloomberg:
“The city’s credit quality could weaken as unfunded pension liabilities grow and exert increased pressure on the city’s operating budget,” Moody’s analysts Matthew Butler and Rachel Cortez wrote. “We expect substantial growth in unfunded pension liabilities even if the city’s recent pension reforms survive an ongoing legal challenge.”
Chicago is obligated to pay $600 million into four pension funds in next year’s budget, though Standard & Poor’s said the contribution may be delayed after Feb. 24 elections led to an unexpected runoff vote between Emanuel and Jesus “Chuy” Garcia.
The third-most-populous U.S. city has $20 billion in unfunded pension obligations that it can’t address without the approval of the state legislature. State lawmakers in June restructured two city pension plans with about $9.4 billion in underfunded liabilities for about 60,000 municipal workers and retirees by making them pay more and reducing benefits. The changes didn’t apply to the police and fire systems.
Labor unions in Chicago sued to block the law in December, and the litigation was put on hold pending the outcome of an Illinois Supreme Court ruling on a state pension overhaul.
While Illinois is the lowest-rated state, credit raters differ on Chicago’s standing. S&P grades the city A+, the fifth-highest rank and four levels above Moody’s. Fitch Ratings ranks it two steps higher than Moody’s.
Chicago has the lowest credit rating of any major city in the country, excluding Detroit.
Photo by bitsorf via Flickr CC License
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.
Standard & Poors downgraded New Jersey’s credit rating today, and—surprise, surprise—the state’s pension funds were a major factor.
S&P downgraded New Jersey’s credit rating one notch. It has gone from what S&P considers a “high grade” (A+) to a “medium grade” (AA-).
The downgrade comes despite efforts by lawmakers, including Gov. Chris Christie, to curb the state’s pension woes. Those efforts included mandating higher annual payments by the state, raising retirement ages, freezing cost-of-living-adjustments and increasing employee contributions.
From the New Jersey Spotlight:
In explaining the decision to lower New Jersey’s credit rating from AA- to A+– a rating higher than only California’s A and Illinois’s A- among the 50 states – S&P’s analysis specifically cited a “trend of structurally unbalanced budgets that include only partial funding of pension obligations and the reliance on one-time measures that are contributing to additional pressure on future budgets; a large and growing unfunded pension liability; significant postemployment benefit obligations; and an above-average debt burden.
Notice the bolded statements—that’s a whole lot of ways for S&P to say that pensions are crippling the state’s finances.
And you can’t blame them. New Jersey’s pension fund remains underfunded by about $52 billion.
Photo Credit: Bob Jagendorf via Wikimedia Creative Commons