Chicago’s Bills Will Increase in 2017 as Pension Costs Escalateby
City forecasts smallest budget shortfall in decade next year
Projected gap assumes enough revenue for $902 million payment
Chicago will live up to its fiscally-challenged reputation in the coming year as its pension liabilities soar.
The junk-rated metropolis will pay at least $902 million in 2017 to its four retirement funds that are only 23 percent funded, meaning the pensions have 23 cents for every dollar owed, according to an annual financial analysis released Friday. That’s down from 35 percent last year. The shortfall across the four funds ballooned to $33.8 billion from $20 billion a year earlier, mostly due to new accounting rules.
Chicago hasn’t paid enough into its retirement funds for years, leaving the city of 2.7 million strapped with hundreds of millions of dollars of obligations and the lowest credit rating of any big U.S. city except Detroit. Officials have been spending more than they’re bringing in, and borrowing to push off debt payments, a practice Mayor Rahm Emanuel has promised to end by 2019. Long-term debt-service payments in 2017 are currently projected at about $2 billion, not counting future issuance, the report shows.
Emanuel is projecting a 2017 budget shortfall of $137.6 million, the smallest since 2007. That’s down from $654.7 million in 2011 when he took office. Still, that assumes there’s enough revenue to pay stepped-up retirement payments. While Emanuel pushed through a record property tax hike in October to provide funding for the public-safety pensions, he still needs state approval for an agreement he reached with unions to keep the laborers’ fund from going insolvent in 2027. He is also working on a fix for the municipal workers’ fund that has the biggest liability of all. Once these accords are finalized, the city expects to pay more to those funds than current projections, said Alex Holt, Chicago’s budget director.
Moody’s Investors Service, which rates Chicago Ba1, one step below investment grade, says the city needs to reverse the trajectory of its pension problem. The steps to bolster the pensions are positive, but the problem is still getting worse, just at a slower pace, according to Naomi Richman, a managing director for the New York-based company. Right now, the city is more likely to get downgraded than upgraded, she said.
“The drag of the pensions is going to make them a focal point and an albatross for the city for years to come,” said Richard Ciccarone, the Chicago-based president of Merritt Research Services LLC, which analyzes municipal finances. “I like the progress that the city is actively trying to come up with solutions. The market will feel better about this when they are set in concrete.”
The city will likely release a plan in the next few weeks to fund the municipal workers’ pensions, said Carole Brown, Chicago’s chief financial officer. Without changes, that fund, only 20 percent financed, is poised to run out of money in 2025. It’s the largest of the city’s pensions and includes nearly 31,000 active members and almost 25,000 retirees. Higher contributions to this pension aren’t included in the projected deficit because any increased payment from the city will be paired with a revenue source, according to the financial analysis.
“We are making good on the promises that the mayor laid out in terms of fiscal reform and dealing with some of those long-standing issues,” Brown said on a conference call Friday.