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Economics

Kroll Bond Rating Agency lifts Chicago bond rating 2 notches on pension reforms

Kroll Bond Rating Agency raised Chicago's long-term general obligation bond rating two notches to A from BBB+, citing efforts to reduce the city's pension burden, among other actions.

"The upgrade reflects identification and dedication of permanent ramp-up revenue sources to address severely underfunded pensions, and KBRA's expectation that addressing these pension obligations long term will prove to be affordable and sustainable for the city's wealth base," it said in its ratings report Monday.

The ratings outlook is stable.

Overriding an earlier veto by Gov. Bruce Rauner, the Illinois General Assembly in July passed a measure that requires Chicago to begin making contributions on an actuarial basis to both the $4.3 billion Chicago Municipal Employees' Annuity & Benefit Fund and $1.2 billion Chicago Laborers' Annuity & Benefit Fund in 2023. It also raised payroll contributions for participants of both pension funds and reduced their age of eligibility for full benefits. Employees hired on or after Jan. 1, 2011, have the option of increasing their payroll contributions in return for their retirement age being reduced. The measure is expected to increase the plans' funding ratios to 90% each by 2058.

Even earlier, in May 2016, the Illinois General Assembly overrode a veto by Mr. Rauner to reduce Chicago's required pension payments to the $2.6 billion Chicago Policemen's Annuity & Benefit Fund and the $806 million Chicago Firemen's Annuity & Benefit Fund over five years, starting in 2016, and extended the deadline for the fire and police pension funds to reach 90% funding to 2055 from the current 2040 deadline.

Raised property tax levies are expected to help cover the city's increased contributions to the police and fire pension funds, while a new water-sewer utility tax and revenue received from a 2014 increase in the city's emergency phone surcharge are expected to help cover the increased municipal and laborers' fund contributions, respectively.

KBRA acknowledged there are still uncertainties, like "post-ramp up funding sources." However, it said that it believes Chicago's wealth base will be able to "absorb these obligations in an affordable and sustainable manner."

Chicago Mayor Rahm Emanuel said in a news release: "This upgrade is a reflection of seven years of work to put our pensions on a path to solvency, address legacy debt issues and reduce the structural budget gap. While there is still more work to do, today Chicago is on firmer financial footing because we came together to address the financial challenges we inherited with real solutions. Today, as a result, we can invest in Chicago's future with certainty, we can provide taxpayers certainty about the city's direction and we can provide businesses the certainty they need to create more jobs for residents across the city."