CHICAGO, April 7 Legislation to ease funding
shortfalls in two of Chicago's four retirement systems is a
modestly positive credit step but not a permanent fix, Moody's
Investors Service said on Monday.
A bill pending before the Illinois Legislature and based on
Chicago Mayor Rahm Emanuel's plan would boost property taxes and
reduce retirement benefits for workers covered by the city's
municipal and laborers' pension funds.
Moody's said that if enacted into law, the measure would
immediately reduce the unfunded liabilities in the two funds.
"However, we expect that the (liability) would then escalate
for a number of years before declining. Accrued liabilities
would exceed plan assets for years to come, and if annual
investment returns fall short of the assumed 7.5 percent, the
risk of plan insolvency may well reappear," the credit rating
agency said in a report.
Emanuel's office has warned that the two systems face
insolvency within nine to 17 years unless changes are made. The
funding shortfall is $8.4 billion for the municipal system and
$1 billion for the laborers system, according to city documents.
Under the mayor's plan, the city would raise property taxes
by $50 million a year over five years while workers' current 8.5
percent contributions to the city's municipal and laborers
retirement systems would rise an additional 2.5 percentage
points over five years. Current annual 3 percent compounded
cost-of-living pension increases would instead be tied to
inflation and skipped in certain years.
After breezing through an Illinois House committee on
April 2, the bill has stalled. Moody's said that even if the
bill makes it out of the legislature, Governor Pat Quinn must
sign it. The law would then face potential challenges to its
legality under the Illinois constitution, which prohibits the
impairment of retirement benefits for public sector workers.
The city's police and firefighters pension systems are not
affected by the new plan. Moody's said city officials are
seeking changes to a state law that requires Chicago to increase
its contribution to the two funds by $600 million.
"The requirement presents a formidable budget pressure for
Chicago," Moody's said.
Last month, Moody's Investors Service dropped Chicago's
credit rating one notch to Baa1, citing a massive and growing
pension liability that remains a threat to the city's fiscal
solvency. Prior to that downgrade, Moody's slashed Chicago's
rating three notches in July.
(Reporting by Karen Pierog; Editing by James Dalgleish)