Junk City Snapshot: Chicago Taxes Rise, But So Does Pension Debt

  • Yields on long-term taxable bonds have fallen since rating cut
  • With tax increase, city paying more into teetering pensions

When Chicago’s credit rating was cut to junk by Moody’s Investors Service in May 2015, the nation’s third biggest city was likened to Detroit, the car-industry hub that was pushed into bankruptcy by a decades-long financial decline.

But going to the courthouse to escape its debts wasn’t an option for Mayor Rahm Emanuel because state law doesn’t allow it. Instead, he refinanced bonds to avoid potentially devastating penalties triggered by the downgrade, pushed through the largest tax increase in the city’s history and secured help from Illinois lawmakers to prevent a steep jump in its pension payment this year.

Chicago’s recently released annual financial report for the year that ended in December -- and bond-market trading -- show that the steps are starting to have a positive impact on the city of 2.7 million. At the same time, the report shows, the shortfall in its retirement fund has swelled to about $33 billion, thanks largely to new accounting rules for deeply challenged pensions, and it continues to spend more than it brings in.

The prices of Chicago bonds reflect the nascent progress, with investors demanding less to own the securities amid a rally in the municipal market. Taxable bonds maturing in 2042 last traded for an average yield of about 6.6 percent, down from as much as 8.2 percent in August.

Investors welcomed a step by Emanuel to stanch the financial bleeding. He approved a record property-tax increase of $543 million to be spread over four years in order to help cover its soaring bills to employee pensions. Those costs are rising because for years officials failed to make annual payments large enough to guarantee all the benefits that have been promised, leaving the city now under pressure to make it up.

The tax hike helped to increase the 2015 property levy -- which will be collected this year -- by 38 percent to $1.19 billion, according to its audited financial statement.

The increase allowed Chicago to come closer to paying what actuaries recommend to ensure it makes good on its pension obligations, though it’s still falling short by hundreds of millions of dollars annually. The gap between what it should have paid -- and what it actually did -- narrowed for all four of its retirement plans.

The years of shortchanging has left Chicago with a considerable debt to the funds. Chicago’s unfunded pension liabilities soared after a new set of accounting rules took effect, which prevent a technique that allowed the worst-off funds to mask the scale of their deficits.

The rising pension costs have been directly reflected in Chicago’s expenses, which have outpaced revenues for the past decade. The city projects its municipal and laborer funds to dry up in 10 and 13 years, respectively, which Moody’s said would force more than half of the budget to be dedicated to pension funding.