Chicago targets pension funding through improved incomes
Chicago’s 2023 budget proposal launches a new pension funding policy aimed at controlling its net pension liability starting with an additional $242 million payment next year.
Sending additional funds from higher-than-expected earnings to the shaky pension system, Mayor CFO Lori Lightfoot hopes rating agencies and investors will notice the city is scrambling to make additional progress on a sore spot chronicle who is primarily to blame for having an junk rating and two other triple-B ratings for his general obligation debt.
“I think it’s a very positive message we’re sending to the market as a whole that the city’s finances have recovered,” Chief Financial Officer Jennie Huang Bennett said, citing Chicago’s success in financing a $1 billion increase in contributions over the past three years and showing the “ways to actually increase our pension contribution payout due to significant revenue outperformance.”
“It’s a statement of significant strength in the city’s finances that I hope the ratings agencies will recognize,” Bennett said. Chicago is rated BBB-minus by Fitch Ratings, A by Kroll Bond Rating Agency, Ba1 by Moody’s Investors Service and BBB-plus by S&P Global Ratings.
Any upgrade, particularly restoring Moody’s rating to investment grade, would give Lightfoot bragging rights as she seeks a second term in the 2023 mayoral contest.
The city has $33.7 billion in net pension liabilities.
Action on pensions, if approved as part of the budget package, is expected to cut $2 billion in payments through the mid-2050s as the city pays off unfunded debt and aims for a funded ratio by 90%.
Lightfoot unveiled the retirement proposal in its $16.4 billion all-funds spending plan, dubbed the “stability budget.” It includes a $5.4 billion enterprise fund. The city currently operates with a budget of $16.7 billion and a corporate fund of $4.9 billion.
Chicago entered the budget season with just an $128 million gap to close — the lowest in recent memory — but that was with the expectation of a roughly $80 million property tax hike on the based on an annual trigger introduced last year that allows for annual increases of up to 5% in line with inflation.
With a municipal election looming, Lightfoot initially said she would seek half of the 5%, or $42.7 million, and last week reversed the entire hike, saying 2022 revenue was around $200. million than projections and that the recovery is expected to continue through 2023. Revenue next year is expected to generate $260 million more than expected.
Lightfoot sounded the alarm to council members against attempts to undo the CPI trigger in the future.
“There is absolutely no way we can go back to the practices of the past where officials made the politically expedient, but fiscally disastrous, decisions to forego telling our taxpayers the truth about the work it takes to meet our pension obligations.” , Lightfoot said.
The Chicago Civic Federation welcomed the pension move and the decision to drop the property tax hike, but is reserving full budget approval for further consideration, said federation president Laurence Msall.
“It’s a good thing to deposit $242 million above the statutory amount because pension funds are so underfunded and it could help avoid having to sell assets in a bear market. is therefore a good use” of the city’s additional revenue, he said.
“It’s also good for taxpayers and in the short term it’s attractive to aldermen, but we need more details on their revenue assumptions and their plan if revenue doesn’t continue to rise,” Msall said.
The budget builds on $460 million in additional revenue not previously factored into the projections, including $260 million in higher tax revenue, $56 million more than the year last thanks to a declaration of surplus funding by raising taxes, $40 million from a one-time upfront payment from Bally’s, which was selected to operate the city’s first casino, $20 million from measures to execution and $15.5 million from non-general fund account swipes.
The additional revenue will fill the budget gap, fund $62 million in new spending and the top-up contribution to the pension plan of $242 million.
Last year, the city warned of an $867 million budget shortfall heading into 2023, but that figure was reduced to around $306 million in the May projections, then reduced to $128 million. dollars over the summer due to healthier revenue collection.
The current gap pales in comparison to the $838 million shortfall that Lightfoot faced in its first budget heading into 2020 and then $1.2 billion heading into 2021 as the COVID-19 was threatening the city’s fiscal foundations and a $733 million deficit heading into 2022. Coronavirus Aid, Relief and Economic Security Act and American Relief Plan Act aid helped manage shortcomings over the past two years, as well as what the city calls more than $1 billion in “structural fixes” combined over the two years.
The city will report a record TIF surplus of $395 million, of which it will be able to keep $98.3 million, while $218.4 million will go to Chicago Public Schools, with the remainder going to other tax agencies. That’s up from $272 million last year and the previous peak of $304 million in 2021.
Bennett described the budget proposal as structurally balanced despite one-time revenues such as the declaration of tax increase funding surplus and casino funds. The city will also use $222 million of the projected closing balance, up from $51 million this year.
“We have reached structural balance” with projected revenue growth sufficient to cover current expenses, Bennett said.
The city expects continued recovery from COVID-19 hits in some revenue streams to gain momentum over the next few years, offsetting one-shots. The city also expects as early as next year to start seeing casino-related revenue after the opening of a temporary casino site along with the permanent casino which is expected to generate at least $200 million annually.
While drawing on a larger amount from the closing balance, the city will keep approximately $1.1 billion in aggregate reserves between its asset rental account and the severe weather fund which was recently increased by $124 million. .
With the potential for economic blows looming if a recession were to take hold, Bennett said the city has some leeway in its conservative revenue growth estimates over the coming years.
With a contribution of approximately $2.3 billion to its four pension funds this year, the city achieved a significant milestone this year by making an actuarial payment to each, putting the four funds on a path to funding 90% between 2055 and 2058. Capitalization ratios have improved slightly, but remain low in a range between 21% and 46%.
Pension contributions are expected to reach nearly $2.7 billion in 2023 when the additional contribution of $242 million is included. They’ve grown by $1 billion since Lightfoot took office. The police and fire funds received an actuarial contribution two years ago and the municipal and labor funds this year.
The road to 90% funding is slow under the formula and for some time net liabilities are expected to increase. The actuarial calculation also remains below a standard contribution determined actuarially according to standard accounting principles.
These factors expose funds to investment return risk, accentuated this year by market losses and the need to sell assets to pay benefits. By the end of August, the funds suffered a 12% investment loss and the city estimates that alone would add $100 million to its future contributions.
Lightfoot’s additional contribution is intended to counter some of the funding timing flaws and risks associated with market returns.
“At the end of the day, we’re putting $242 million more into our pension funds and we’re going to do the same to get to that level where our net pension liability remains,” Bennett said. “We want to give funds liquidity…so they don’t have to sell assets to pay benefits in this current market at a significant loss.”
The city intends to take similar action each year with future prepayments tied to the level needed to avoid the growth of unfunded liabilities.
“It’s not a one-time thing. It’s a proposed change to our pension funding policy,” Bennett said.
Additional savings of $100 million for every $1 billion borrowed would be seen in interest if the change resulted in an improved rating, Bennett said.
Lightfoot’s budget would use $152 million of remaining ARPA funds. Most of the federal relief has been channeled into programs outside of the enterprise fund.
Budget hearings begin Thursday with the finance team presenting the spending plan and subsequent hearings scheduled for aldermen to question department heads on spending plans.
The city is planning a series of deals later this year and next year. First, the city will issue up to $900 of new general bond debt in December, which will include its first set of environmental, social and governance bonds of between $100 million and $150 million. .
The city also plans to sell up to $1.2 billion in new money and repay water revenue and wastewater obligations in the first quarter of 2023. An airport transaction from Midway is also expected next year as well as another tranche of GO borrowing at the end of the year, Bennett said.