CHICAGO (Reuters) – Legislation signed into law on Wednesday by Illinois Governor J.B. Pritzker to consolidate 649 local public safety worker retirement systems is a positive step, but will not end funding problems for cities, credit rating agency analysts said.
FILE PHOTO: lllinois Governor J.B. Pritzker delivers remarks at the North America’s Building Trades Unions (NABTU) 2019 legislative conference in Washington, U.S., April 9, 2019. REUTERS/Jeenah Moon/File Photo
Ballooning pension liabilities for some Illinois cities have led to budget cuts, credit rating downgrades, as well as the sale of city assets to generate funding.
Illinois’ Democratic governor hailed the measure’s creation of two statewide systems for police and firefighters as a “monumental accomplishment” that will ease demands on local property taxes by increasing investment returns by as much as $2.5 billion over the next five years.
Tom Aaron, a Moody’s Investors Service analyst, said the new law should result in administrative cost savings, while potentially improving long-term investment performance by pooling the funds’ assets and increasing the level of professional management.
“But at the same time it doesn’t change the unfunded position of the plans,” he said. “It’s not as though the better-funded systems are somehow going to be providing a subsidy for the worst-funded systems.”
Aaron said cities with big liabilities will continue to face the challenge of dealing with rising pension costs while maintaining at least a baseline level of services.
Because the Illinois Constitution prevents cuts to public sector worker retirement benefits, the state and its local governments have been struggling to find funding solutions.
Geoff Buswick, an S&P Global Ratings analyst, said “the funding question is still out there.”
“There is still a sizeable unfunded liability with so many cities and towns across Illinois,” he said, noting that credit challenges will remain as a result.
Pritzker said his pension task force will turn its attention to the state’s five retirement systems, which ended fiscal 2019 with an unfunded liability that climbed by $3.8 billion to $137.3 billion.
Chicago, which Moody’s rates at the junk level of Ba1 due to uncertainty over the long-term affordability of its “unusually large” pension burden, will also be a focus of the task force. The city’s woefully underfunded police and firefighter retirement systems were not part of the consolidation law.
The aggregate funded ratio for police and firefighter pension funds outside of Chicago was 54.8% in fiscal 2018, down slightly from fiscal 2017, while the combined unfunded actuarial liability grew by 7.1% to $12.3 billion, according to an Illinois Department of Insurance report.
Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis