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UPDATE 2-S&P revises Chicago's outlook to negative on pension costs
September 16, 2013 / 6:48 PM / in 4 years

UPDATE 2-S&P revises Chicago's outlook to negative on pension costs

CHICAGO, Sept 16 (Reuters) - Chicago’s credit rating with Standard & Poor’s Rating Services could be downgraded within the next two years due to the city’s escalating public pension payments, the rating agency said on Monday.

The city’s pension woes already led Moody’s Investors Service to drop Chicago’s general obligation rating three notches to A3 with a negative outlook in July, while Fitch Ratings in June put the city’s AA-minus rating on review for a possible downgrade.

Using newly revised general obligation rating criteria, S&P on Friday changed the outlook on Chicago’s A-plus general obligation rating to negative from stable.

“We could lower the rating within the next two years if the city substantially draws down its reserves in an effort to increase its pension payments in line with state mandates, regardless of whatever relief the state legislature may provide,” S&P said in a report.

Under an Illinois law mandating actuarially required pension payments for police and fire retirement funds, Chicago’s payment is projected to top $1 billion in fiscal 2015 from $483.4 million in fiscal 2014, which begins Jan. 1. Subsequent payments are expected to continue to climb, hitting $1.25 billion in fiscal 2020, according to a fiscal analysis released by the city in July.

Without a dramatic increase in revenue, Chicago would need the Illinois Legislature to pass reforms to ease pension payments. However, state lawmakers have yet to come up with a solution to Illinois’ $100 billion unfunded pension liability.

S&P noted the unfunded liability for Chicago’s four retirement funds had grown to $19.4 billion in 2012 from $11.9 billion in 2009, with a funded level of just 35 percent. An 80 percent funded level is considered healthy.

“At this time, the city’s position is that it will continue to seek legislative support and labor concessions,” the S&P report said. “Even if the city is able to smooth out the contributions, the increased costs will likely be an impediment to significant future budget surpluses.”

Kelley Quinn, a spokeswoman for Chicago Mayor Rahm Emanuel said he is urging state lawmakers to find common ground on pension reform.

“Mayor Emanuel has said for more than a year that without comprehensive pension relief from Springfield, municipalities such as Chicago would continue to receive negative reviews from rating agencies,” she said. Springfield is the state capital.

The credit rating agency said while Chicago enjoys a broad and diverse economy and home-rule powers over taxation, “its flexibility is limited by the city’s reluctance to adjust taxes.” It also pointed to “very weak budgetary performance” and high debt levels for the nation’s third-largest city.

The rating agency added that the city could retain its A-plus rating with a stable outlook if pension payments are made “while maintaining balanced budgetary performance and reserves at or near their current level.”

The outlook revision resulted from S&P’s release last week of changes to its GO rating criteria, the rating agency said.

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