By Fran Spielman Chicago Sun-Times
Chicago faces “significant challenges” and remains “vulnerable” to further downgrades to its junk bond rating without a new and approved plan to save two of four city employee pension funds to replace the one overturned by the Illinois Supreme Court, a Wall Street ratings agency warned Thursday.
Standard & Poor’s acknowledged that Mayor Rahm Emanuel’s stunning victory over Gov. Bruce Rauner on police and fire pensions and the $543 million property tax increase approved last fall to fund those same pensions “provide some clarity” with the respect to the “funding sources and trajectory of future city contributions.”
But Chicago is by no means out of the woods. Far from it, S&P said.
“We feel Chicago still faces significant challenges without a comprehensive pension overhaul to its Municipal and Laborers plans and that the city remains vulnerable to further rating downgrades,” Standard & Poor’s analysts wrote in a report released Thursday.
“The city’s credit quality could weaken unless it gains both union and legislative support for any changes to its Municipal and Laborers plans and identifies a solid funding mechanism to address the unfunded liabilities and prevent further destabilization of its budget.”
Failure to find solutions that “address the long-term viability of the pension plans could lead us to downgrade the rating,” the report states. It notes that “additional pressure could ensue in the longer term if the plans’ funding levels do not improve.”
Last month, Emanuel cut a new deal to save the Laborers Pension fund to replace the agreement struck down by the Illinois Supreme Court.
It calls for employees hired on or after Jan. 1, 2017, to become eligible for retirement at age 65 in exchange for an 11.5 percent pension contribution. That’s a 3 percentage point increase higher than the existing contribution.
Veteran employees hired after Jan. 1, 2011, will have a choice. They can retire at age 65 with an 11.5 percent pension contribution or wait until 67 with an 8.5 percent contribution, a 35 percent increase. Emanuel’s now overturned plan called for a 29 percent increase in employee contributions.
The city is still working on a trade-off for employees hired before Jan. 1, 2011. It’s likely to offer years of service in exchange for a simple, instead of a compounded, cost-of-living adjustments, sources said.
In exchange for those cost-saving concessions, Emanuel agreed to earmark all of the revenue from a 56 percent increase in Chicago’s telephone tax approved by the City Council in 2014 to shore up a Laborers Pension Fund with $1.3 billion in unfunded liabilities due to run out of money in 12 years.
The $40 million a year generated by the $3.90-a-month surcharge tacked on to the bill for both land lines and cell phones was supposed to be used to cover the city’s first-year contribution to both the Laborers and Municipal Employees Pension Funds.
Now, the city will be forced to find another funding source to save a Municipal Employees Pension Fund with $9.8 billion in unfunded liabilities, due to run out of money in just eight years. Sources said a second telephone tax hike in two years is a possibility.
In Thursday’s report, Standard & Poors noted what Emanuel has publicly stated — that the Laborers plan is likely to be a model for the 32 unions whose 71,000 members draw their retirement checks from the Municipal Employees pension plan.
But the rating agency warned, “Contributions to this plan are significantly larger, and the city would have to identify a revenue source to fund the future contributions to the municipal plan. Potential revenues . . . are not forthcoming at this time.”
Changes to both plan also needs approval from the Illinois General Assembly. That would require a three-fifths vote.
S&P analysts noted that Chicago’s sweeping home-rule powers give it “taxing flexibility.” But the city has been “historically” reluctant to flex that muscle until last fall, when Emanuel convinced a reluctant City Council to raise property taxes by $588 million for police and fire pensions, and school construction.
“We recognize the increased contributions to the police and fire pension plans, albeit at the phased-in amount [allowed now that Rauner’s veto has been overridden] are an important first step in addressing two of the city’s four pension plans,” S&P wrote.
“But beyond this first step, the city may be met with resistance to continue raising property taxes to fund its increasing police and fire pension obligations in subsequent budgets, particularly since it must also address the unfunded liabilities in the Municipal and Laborers plans.”
Standard & Poor’s did not mention that Emanuel has offered to raise property taxes by an additional $175 million for teachers pensions— whether or not the state does its part to help the nearly bankrupt Chicago Public Schools.