The Illinois Supreme Court’s rejection of a 2014 pension reform law for two Chicago pension funds is a “credit negative” for Chicago, Moody’s Investors Service said in a report Tuesday.
Tuesday’s announcement does not signify a rating or outlook change but aims to show one of the many credit factors affecting Chicago. Moody's downgraded Chicago's credit rating to junk in May, citing pension concerns.
The Supreme Court ruled March 24 that the law violated the state's constitutional clause that pension benefits “shall not be diminished or impaired,” upholding the decision reached in a Cook County Circuit Court in July.
The Moody’s announcement came on the heels of a credit downgrade by Fitch Ratings. Fitch on Monday lowered Chicago’s credit rating two steps to BBB-, one step above junk, also citing the March 24 ruling.
The city pension reform law, which was signed by then-Gov. Pat Quinn on June 9, 2014, and took effect Jan. 1, 2015, raised employee and employer contributions and reduced retiree cost-of-living adjustments for participants in the $4.6 billion Chicago Municipal Employees' Annuity & Benefit Fund and the $1.35 billion Chicago Laborers' Annuity & Benefit Fund
The Moody’s report said: “Delayed implementation of a clear plan to fund municipal and laborer pension plan liabilities will likely weaken Chicago’s credit quality. Additionally, poor asset performance relative to plan investment return assumptions will be a key credit determinant.”
The laborers’ plan returned a net -1.5% in 2015, according to an online performance report. Information on the municipal plan could not immediately be learned.
Regarding a path forward, Moody’s said: “Without the benefit savings (the overturned law) established, Chicago’s contributions will have to rise even further if the city is to stick to the schedule of a 90% funded ratio by 2055. Negotiating increased employee contributions remains an option, but would likely have only a modest effect on lessening Chicago’s funding burden. Extending the amortization period would reduce annual costs, but at the expense of rapidly rising pension debt.”
Fitch in its report said the outlook for Chicago is negative.
“Fitch believes last week's Illinois Supreme Court ruling striking down pension reform legislation for two of the city of Chicago's four pension plans was among the worst of the possible outcomes for the city's credit quality,” said the ratings agency in an e-mail. “Not only did it strike down the pension reform legislation in its entirety, but it made clear that the city bears responsibility to fund the promised pension benefits, even if the pension funds become insolvent.”
The city has projected the municipal employees and laborers pension funds, with roughly $7 billion and $720 million in unfunded liabilities, respectively, could become insolvent in 2026 and 2029. The overturned law aimed to increase both the municipal and laborers’ pension funding levels to 90% by end of 2055, up from 41% and 64%, respectively, at the end of 2014.
Standard & Poor's Ratings Services said last week that the Supreme Court’s decision shows the need for additional action by the city, but there was no ratings change. S&P lowered Chicago’s general obligation bond to BBB+ from A- in July.
Chicago faces roughly $20 billion in unfunded liabilities across its four pension funds.
A city spokeswoman could not immediately be reached for comment.