Aug 27 Moody's Investors Service on Tuesday cut the general obligation limited and unlimited tax bond ratings of the Metropolitan Water Reclamation District of Greater Chicago in Illinois to Aa1 from Aaa, affecting about $2.6 billion of debt.
The rating agency also revised the district's outlook to negative, reflecting the probability of continuing growth in the district's unfunded pension liabilities, the rating agency said in a statement.
The "outsized pension liabilities" have "grown due to contribution levels that have fallen short of actuarial standards," it said.
The downgrade partly rests on the "significant debt burden and pension liabilities" of Chicago, which represents half of the district's tax base, Moody's said.
Last month Moody's slashed Chicago's GO rating three notches to A3 with a negative outlook due to the city's pension shortfall and related budget pressures. This month, it downgraded its GO rating for the largest county in the state, Cook County, to A1 from Aa3 because it shares about half its tax base with Chicago.
Chicago is bracing for a big spike in pension payments starting in 2015 to comply with a state law requiring it to increase funding for its retirement system for public safety workers. The payments are expected to grow from $479.5 million in 2014, which begins Jan. 1, to about $1.07 billion in 2015 and $1.11 billion in 2016.
According to the water district's retirement fund, its pension was only 50.4 percent funded, with an unfunded liability of $1.06 billion, in the year ended Dec. 31, 2012.
The fund said that the water district transferred an extra $30 million to the pension last year and another $30 million at the beginning of this year. In its own annual report, the water district said it contributed $100.52 million in 2012 to the pension, nearly twice the $55.4 million it put in in 2011.
At the same time, the water district's annual pension contributions, determined as a multiple of the amount put in by employees, were set to go up this year just as the fund's investments began improving. According to the pension fund, its assets earned a rate of return of 11.9 percent in 2012, the last year data is available, compared to their loss of 0.3 percent in 2011. Investments are the pension's largest source of revenues.