Chicago and surrounding Cook County have the largest pension burdens among the 50 most-indebted U.S. local governments, according to Moody’s Investors Service.
The third-most-populous U.S. city’s pension liabilities represent 678 percent of its revenue, a Moody’s study released today shows. Cook County had the second-worst ratio at about 382 percent, while the Metropolitan Water Reclamation District of Greater Chicago had the sixth-highest burden at 323 percent.
Moody’s cut Chicago’s bond rating three levels to A3, seventh-highest, in July and dropped Cook County a step to A1, fifth-best, in August, citing pension liabilities in both cases.
“There are several large local governments with outsized pension burdens large enough to cause material financial strain,” notably Chicago and Cook County, according to Moody’s. “Chicago’s tax base is pressured by the unfunded pension liabilities of the city and overlapping local governments.”
The findings mirror those in the New York-based company’s June study of state pensions. That report showed that Illinois, Moody’s lowest-rated U.S. state with an A3 grade, had the highest ratio of retiree obligations to revenue, at 241 percent.
Investors in the $3.7 trillion municipal market have penalized Chicago since Moody’s cut its rating on July 17, the day before Detroit’s record U.S. municipal-bankruptcy filing. Chicago’s pension obligations relative to the full value of its taxable real estate, a measure of total economic wealth, is 12.6 percent, compared with Detroit’s 10.8 percent, according to today’s report. The average among the 50 issuers is 2.7 percent.
The extra yield buyers demanded to own Chicago general-obligation bonds maturing in January 2042 instead of benchmark AAA munis rose to 3.69 percentage points this week, close to the highest since at least February and up from 2.57 percentage points on July 17, data compiled by Bloomberg show.
Moody’s has also lowered ratings on the Chicago Board of Education, the Cook County Forest Preserve District and the Chicago Park District because of pension liabilities. All the retiree funds were created by the state, and changing them requires legislative approval.
Chicago’s Democratic Mayor, Rahm Emanuel, 53, has said Detroit’s bankruptcy “should be a wake-up call for all of those who try to put their head in the sand and say that we don’t have a problem” with pensions. His administration has said that retirement contributions will cost Chicago about $1.2 billion in 2015, more than twice the $467 million forecast for 2014, if the state legislature doesn’t restructure the system.
The Illinois pension system is the worst-funded among U.S. states, and a fix has eluded lawmakers for years. In the past 100 days, legislators have failed twice to reach an agreement in special sessions called by Governor Pat Quinn, a Democrat, to deal specifically with retiree obligations.
Not all local governments face such severe pension strains. The District of Columbia’s retiree obligations represent 11 percent of revenue, lower than all the other localities in the Moody’s report. In all, 30 of the 50 have annual net pension liabilities that exceed tax receipts.
Moody’s calculates adjusted net pension liabilities using the difference between the actuarial value of the plan’s assets and adjusted liabilities, according to the report. The 50 issuers it analyzed were selected because they have the most debt outstanding.