Moody's Investors Service has upgraded Chicago's rating on its general obligation unlimited tax bonds to Baa3 from Ba1, reflecting the city's increase in pension contributions.
The upgrade comes on the heels of the Chicago City Council on Monday approving Mayor Lori E. Lightfoot's fiscal year 2023 budget, which included additional contributions.
"The upgrade of the issuer rating to Baa3 reflects the city's substantial increase in pension contributions, including an upcoming boost to comply with the city's new pension funding policy that targets contributing an amount sufficient to keep reported net pension liabilities from growing," said David Levett, vice president and senior analyst at Moody's, in an email Tuesday.
The budget includes a total of $2.6 billion in contributions to the four city pension funds — the $3.3 billion Chicago Municipal Employees' Annuity and Benefit Fund, $3 billion Chicago Policemen's Annuity and Benefit Fund, $1.3 billion Chicago Laborers' Annuity and Benefit Fund, and the $886 million Chicago Firemen's Annuity and Benefit Fund — and also adds a $242 million advance payment toward future pension contributions.
That payment reflects the implementation of a new pension funding policy of advancing future pension contributions to stabilize and potentially decrease the city's net pension liability in the future.
The city of Chicago's pension funds are among the worst funded in the country. According to their most recent actuarial valuation reports, as of Dec. 31, the municipal employees' plan's funding ratio was 22%; the policemen's funding ratio, 24%; the laborers' plan's funding ratio, 48.2%; and the firemen's funding ratio, 20.9%.
In an Oct. 3 news release announcing the 2023 budget proposal, Ms. Lightfoot cited the city's strong economic recovery from the COVID-19 pandemic in allowing additional contributions.
"For the first time in the City's history, the City made an actuarially determined contribution in FY2022 for all four pension funds," Ms. Lightfoot said in the news release. "Now, the City's financials are strong enough now that it can begin to pay down its pension credit card. Paying down our pension credit card will save nearly $2 billion in future pension costs and prevent significant investment losses in the pension funds."
The Moody's rating upgrade reflects an upgrade to the city's obligations to "moderate credit risk" from "substantial credit risk," according to the rating agency's long-term rating definitions.
