Jacksonville, Fla., with the third most underfunded pension plans of the largest U.S. cities, is considering an unprecedented solution that might preserve the city's credit rating at the expense of its utility's rating.
Jacksonville, rated the second level of investment grade by Moody's Investors Service, wants JEA to contribute $40 million annually to help avoid a downgrade. The utility, formerly called the Jacksonville Electric Authority, is ranked two steps lower by Moody's and, trying to dodge a cut of its own, said it can't afford the payment.
The city's effort shows how the creditworthiness of municipalities is under pressure with state and local government pension plans underfunded by at least $1 trillion, according to a January report by the Nelson A. Rockefeller Institute of Government in Albany, N.Y.
Among the 25 largest U.S. cities, only Chicago and Philadelphia have pensions that are more underfunded than Jacksonville's, according to a November report by Morningstar Inc.
JEA's “first obligation is to the ratepayers,” not solving the city's pension woes, said Mike Hightower, chairman of the utility's board.
“My initial reaction was, we don't have $40 million,” Mr. Hightower said. “If we had $40 million, first we would either give it to back to our ratepayers or we would be reducing our debt.”
Jacksonville Mayor Alvin Brown, who proposed the JEA plan, said the utility could cut costs to offset the extra payment and avoid a downgrade. The utility already transfers about $106 million annually to the city.
“For JEA to be successful, the city has to be successful,” Mr. Brown said.
Pension costs in Jacksonville have risen more than six-fold since 1992 and now account for about 19% of its $983.7 million annual budget.
The pension for police officers is 39% funded, and the city's total $5.2 billion unfunded liability is four times the size of its operating revenue, the fourth-highest ratio in the nation, according to Moody's.
“There's a finite number of resources available to the operating budget and the pension has consumed an increasingly larger share very quickly,” said Michael Rinaldi, a Fitch Ratings analyst in New York.
Moody's said it may downgrade Jacksonville by one or two steps from Aa1 by mid-April, because of rising pension costs, Dan Seymour, a Moody's analyst, wrote in a Jan. 15 report.
Fitch rates JEA's bonds AA, its third-highest grade, with a stable outlook. Christopher Hessenthaler, a Fitch analyst, wrote in a Feb. 7 report that the Jacksonville mayor's plan is a “credit concern” for JEA.
Jacksonville is holding off on new bond sales until adopting a solution to the pension shortfall, said C. Ronald Belton, Jacksonville's chief financial officer. Borrowing costs might go up further if the city is downgraded, he said.
JEA is in the process of selling about $74 million in refunding revenue bonds.
Mr. Brown said a $560 million contribution from JEA — $40 million annually for 14 years — may help the city's pension system become 80% funded by 2028. He said his plan, which includes scaling back some retiree benefits, might save the city $2.75 billion over 35 years.
In July, Mr. Brown unsuccessfully attempted to reduce worker benefits to bring down pension costs. The City Council killed the plan.
A month later, Fitch changed its outlook on Jacksonville bonds to negative, threatening to downgrade the city's AA rating, “at least one notch” if the pension overhaul effort stalls.
A city-commissioned task force has been seeking ways to cut pension costs, which have crowded out spending on education, public safety and social services.
JEA's Mr. Hightower said the utility's board would consider the city proposal. The mayor has offered to help JEA find savings in its $1.8 billion budget to offset the additional payment. If JEA's seven board members, appointed by the mayor, sign off on the extra payment, the City Council could then ratify it as part of a pension rewrite.
Unlike other cities facing pension shortfalls, Jacksonville has not skipped payments on its required annual contribution to retiree benefits.
Jacksonville has funded its growing pension obligation by cutting services, reducing its payroll and raising taxes, Mr. Belton said. With the pension contribution set to increase to $181 million this year and continue rising, the city is looking for a plan to pay down the unfunded liability without gutting social services.