Fitch: Chicago Pension Litigation Threatens Progress
December 19 2014 - 8:35AM
Business Wire
Tuesday's legal challenge to Chicago's recent pension reform
plan was expected and underscores the difficulty the city faces in
its efforts to put its pension plans on firmer footing. Illinois
affords particularly strong legal protection to pension
benefits.
If the litigation succeeds and changes to the cost of living
adjustments (COLAs) and employee contributions are struck down (and
no replacement legislation is passed), the city would likely revert
back to the lower, statutorily based payments, as annual payments
on an actuarially sound basis would rise dramatically. These
increases would occur in the context of a statutorily required $538
million increase in contributions for the city's other two pension
systems (police and fire) in 2016. The city has not yet said how
the increased pension costs will be accommodated, but Fitch Ratings
believes they threaten to crowd out other governmental priorities
and remain a formidable challenge to the city's financial
equilibrium.
The city benefits from a strong local economy and enjoys broad
home rule authority to raise revenues. However, increasing pension
costs are a common problem among Chicago-area governments and
funding these increases will likely place a considerable stacked
burden on the area's resource base.
All four of Chicago's (A-/Outlook Negative) pension plans are
poorly funded, at a combined 35%, according to Fitch. Annual
payments historically were calculated and made based upon a
statutory formula, rather than on actuarial projections. The
Illinois legislature passed changes to two of Chicago's four
pension plans in April 2013, trimming future growth of the
liability with changes to the COLA while providing increased
contributions from employer and employees.
If the new plan is upheld, it would require significant payment
increases from the city, approximately half of which are expected
to be funded by increased property taxes and half by budgetary
savings. The city plans to gradually increase its revenues for
pension payments, which may include property taxes, by $50 million
(approximately 6%) annually for five years before reaching the
target increment of $250 million in the fifth year.
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Fitch RatingsArlene BohnerSenior DirectorU.S. Public Finance+1
212-908-055433 Whitehall StreetNew York, NYorRob RowanSenior
DirectorFitch Wire+1 212-908-9159orMedia Relations:Elizabeth
Fogerty, +1 212-908-0526elizabeth.fogerty@fitchratings.com