Chicago City Council recently passed a 29.5% tax on its water and sewer utility bills to fund pension payments for its municipal employee pension plan. The new tax will be phased in over four years, and will generate $56.4 million next year and an estimated $240.1 million by 2020. This is on top of an $838 million property tax increase to fund police and fire pension plans and school construction. But wait, there is more.
Over the last two years water rates in the city have also doubled. Chicago is making hard choices to make sure its pension systems are solvent, but at the same time its residents are getting soaked. In reality, many state and local governments that fail to contribute 100% of their annual required contribution rates and already have poor pension funding ratios eventually may be forced down a similar path—and the Government Accounting Standards Board (GASB) may expedite the process. Taking effect between 2013 and 2017, GASB has introduced five rules that will materially change the way states and local governments report assets and liabilities on their balance sheets. The first rule requires governments to report net pension liabilities (GASB 67), and the final rule, effective in 2017, will force recognition of other post-employment benefits, or OPEBs (GASB 75). Together these rules will highlight those state and local governments that have underfunded their pension obligations, and they will force governments to pay more attention to OPEBs.
In our view, the rule changes along with growing retirement liabilities may lead other communities to use methods similar to Chicago to raise revenues to fund employee benefits. We continue to favor credits that have fiscal flexibility and financial management skills that limit the impact of pension and OPEB liabilities.Source: Chicago Sun Times, Chicago Tribune, Barclays and SNWAM Research