CHICAGO, May 3 (Reuters) - Illinois’ move earlier this year to withhold state money from cities over pension underfunding has raised a red flag that the practice could endanger bond payments.
The credit concerns by rating agencies on Thursday arise from an Illinois law that aims to get municipal retirement systems 90 percent funded by 2040 and that allows the systems to seek state withholding of revenue due municipalities if pension contributions fall below required levels. So far, state money has been withheld from the cities of Harvey and North Chicago, according to the Illinois Comptroller’s Office.
Moody’s Investors Service said that the state supreme court’s recent refusal to allow Harvey to immediately free the money underscores that “municipal pensions are ‘must-pay’ obligations under Illinois law and have greater protection against default than a city’s general obligation bond.”
Meanwhile, sales taxes that Chicago and one other Illinois city have assigned to corporations they created to sell debt backed by the revenue are immune from a state intercept over pensions, Fitch Ratings said.
The Illinois Supreme Court last week vacated an appellate court order directing the state comptroller to return about $1.7 million in tax revenue it withheld from the cash-strapped Chicago suburb of Harvey at the request of the city’s police and firefighter retirement systems.
“The city is now unable to afford state-mandated pension contributions to improve funding levels while also maintaining spending on other service priorities, calling into question the ultimate affordability of its debt,” Moody’s said.
The credit rating agency said Harvey missed eight GO bond payments over the last two fiscal years.
Meanwhile, financing corporations created by Illinois cities “have no pension obligations and therefore there is no legal basis by which their revenues would be diverted by the state comptroller,” Fitch said.
Chicago last year created a Sales Tax Securitization Corporation as a vehicle for refinancing up to $3 billion of outstanding sales tax revenue and GO bonds under a structure that gives bondholders a statutory lien on the city’s state-collected sales taxes. The bonds earned higher ratings, allowing the city to reduce its borrowing costs.
The fiscally stressed suburb of Bridgeview also formed a similar corporation.
Chicago, which is rated BBB-minus by Fitch and Ba1 by Moody’s, has taken steps in recent years to increase contributions to its four pension funds. (Reporting by Karen Pierog in Chicago Editing by Matthew Lewis)