All Press Items

November 12, 2015

By Gunjan Banerji

The clock is ticking for the City of Chicago’s police and fire pension reform, which is at risk of remaining on Governor Bruce Rauner’s desk past the city’s deadline for passing a property tax high enough to properly fund the systems.

The Illinois legislature still needs to send SB777—Chicago’s police and fire pension reform estimated to save the city USD 220m next year—to the Governor for his signature, who would have 60 days to veto legislation. Illinois lawmakers passed the bill in June but did not send it to Rauner, as reported. The political play complicates matters for the Windy City, which already passed a  budget pegged to a favorable outcome of this bill, and is simultaneously facing legal backlash on its municipal and laborer pension reform.

“Since we are now into November, it’s possible for Governor Rauner to sit on the bill until after the New Year,” said Bobby Otter, a budget director at the Center for Tax and Budget Accountability. “If that were to happen, Chicago will miss the deadline for setting the appropriate property tax levy for next year.”

The bill saves the city USD 850m over the next five years, and extends the period of time that the city has to fully fund its retirement plans, as reported. The city has also pegged its USD 543m property tax increase to these tenuous savings.

Questionable track record

The city has until 29 December to set its property tax levy for 2016, according to the Cook County Clerk’s office. If the levy is not set by the end of the year, Chicago will have to muster together other options for funding its police and fire pensions under current law, Otter said. Once the deadline passes, the city can reduce its levy, but may not increase it under existing statute, said a Cook County spokesperson.

It’s highly unlikely that there will be a second vote in the Chicago City Council office prior to the end of the year to vote on a higher property tax increase, Otter said. Right now, the city’s approved property tax levy indicates that the city will fund its pensions according to the SB777 statutes; the question is whether the city will make the higher payments under current law if
SB777 is not passed, Otter said. “Chicago hasn’t demonstrated to me that it will be prudent and apply the money only to fixing the pension problem,” said Michael Degernes, a portfolio manager at Aberdeen Asset Management.

Municipalities that have trouble producing balanced budgets often let expenses rise as revenue increases, Degernes said, pointing to Illinois as an example. Lawmakers raised a temporary
income tax increase in 2011 as an attempt to pay for past obligations. However, the dollars raised didn’t go to fix the past problem. Rather, the increased funds dealt with the state’s current issues, Degernes noted.

It’s clear that pension requirements have historically been easy obligations to underfund, Degernes added. The city’s 37% funded pensions have a USD 20bn unfunded liability. A spokesperson for the city stated that if SB777 is not enacted, the city would continue to work on responsible pension reform that protects taxpayers, while also funding the city’s obligation to its first responders’ retirements. The spokesperson did not address where the city would find the revenue to fund the city’s obligations.

Like mother like daughter

Illinois, with its own dragons to slay, has not taken steps to legislatively or financially help Chicago or its school system, both overseen by Mayor Rahm Emanuel (D). Moody’s Investor Service and Fitch Ratings each downgraded the state in October to Baa1 and BBB+/stable, respectively. It’s rated A-/negative by Standard & Poor’s. 

Chicago has always assumed that SB777 would be signed by the governor, particularlybecause the governor included SB777 in his own pension reform bill, said a spokesperson for the city. The governor’s sprawling pension reform bill has so far fallen flat with Democrats as the state has been without a budget for 135 days into its new fiscal year. 

Without a resolved budget, it’s difficult to imagine the gridlocked state resolving some of its pension issues, said Natalie Cohen, managing director of municipal securities research at Wells Fargo. Given the state’s dearth of funds—it has USD 6.7bn in unpaid bills— even when its budget is resolved, Chicago and the Chicago Board of Education may not receive all the help
being bargained for, Degernes said.

As the various Illinois powerhouses standoff against each other, which groups will ultimately budge to compromise is the question, Cohen said. The city has 48 days to finalize its property tax levy, as the state budget standstill continues without an obvious resolution for the fifth month.

Market pleased

Despite the uncertainty ahead, the market has well-received the city’s attempts to fund its pensions with property taxes. 

Spreads on Chicago general obligation bonds have tightened 100bps since late August, right before the mayor introduced the historic property tax increase, according to Electronic Municipal Market Access (EMMA). A USD 70m tranche of Series 2014A general obligation bonds last traded on 11 November at 99 yielding 5.08%, up from 87.8 yielding 6.08% on 27 August, according to EMMA. 

But a rating agency disagrees. According to a Moody’s report dated yesterday, of the four scenarios up in the air regarding city pensions, not adopting SB777 alongside a favorable municipal and laborer ruling is the most favorable as it slows the city’s unfunded liability growth. 

The city’s municipal and laborer oral arguments are slated to begin on 17 November.

Source: Debtwire