Bonds

Chicago Park District draws dual outlook reward for pension overhaul, weathering COVID-19

The Chicago’s Park District’s pension overhaul that pulled the system off a track to insolvency along with a healthy balance sheet that has overcome early COVID-19 pandemic hits have stabilized the district’s ratings, Fitch Ratings and S&P Global Ratings said.

Fitch and S&P revised the outlook to stable from negative on the district’s AA-minus general obligation ratings. The district has $255 million of outstanding GO debt, Fitch said.

The change “reflects the successful implementation of the recently passed pension reforms that eliminated the depletion date of pension assets by 2028 and puts the pension plans on a path to solvency,” Fitch said in the report published Monday.

“The outlook revision reflects CPD’s strong financial results in fiscal 2021, which we expect will be replicated in 2022, signaling that the worst of the budgetary fallout from the COVID-19 pandemic has passed. The revision also reflects our view that that CPD is positioned to manage higher, actuarially-based pension contributions in the coming years following the passage of pension reform legislation last year and demonstrated progress in reaching full actuarial funding,” said S&P Global Ratings analyst Scott Nees.

State lawmakers made the statutory changes to the district’s plan during their 2021 session and Gov. J.B. Pritzker signed the legislation last August. The pension plan is now on track to a 100% funding goal by 2057.

People take photographs in front of the Cloud Gate sculpture, known as the Bean, at Millennium Park in Chicago.

Bloomberg News

“Prior to the implementation of the pension reforms, the district faced a looming pension asset depletion date in 2028, which would have subjected the district to paying retiree benefits on a pay-go basis, ultimately leading to a significant increase in the district’s annual employer contributions,” Fitch said.

The district is among the higher-rated Chicago sister agencies that are independent bond-issuing organizations with overlap on the same tax base. They fall under city influence because their boards are appointed by Mayor Lori Lightfoot.

“The AA-minus rating is based on the district’s very high available general fund balance and its ability to reduce expenditures, which served to mitigate much of the pandemic-related revenue shortfalls in 2020,” Fitch said. “The district’s revenue has improved in recent years as the district reopened its facilities and expanded park programs, including events scheduled at Soldier Field.”

The district’s fund balance was more than $200 million at the close of 2021, that’s more than 70% of spending. An additional $23 million was added in 2021.

Pension strains still weigh on the rating and the new schedule doesn’t put the fund at even a 40% funded ratio until 2039, which remains a concern of rating agencies, but it marks a turnaround for a system that is carrying a nearly $800 million unfunded liability.

Under the legislation, the district scrapped prior rules that put contributions at 1.1 times employee payments with contributions coming only from property taxes. The district is now ramping up contributions to an actuarially determined level by 2025. The district also was able to make a $40 million supplemental contribution from reserves and payments can come from “any source legally available.”

With the supplemental contribution, the district sent a total of $83.3 million to its pension system in 2021, over the $70.5 million ADC. The pre-overhaul statutory contribution would have allowed for only a $13.1 million payment.

The legislation also established a third-tier benefit structure beginning this year, which calls for increased employee contributions. The legislation also granted $250 million of pension obligation bonding authority with a cap of $75 million sold annually to supplement contributions if needed to stabilize the system and avoid asset depletion. The borrowing won’t count against caps tied to tax collections.

“Despite the likelihood that market losses this year will contribute to higher near-term pension costs than projected in the latest actuarial valuation, we expect the cost trajectory to be manageable within the district’s existing budgetary framework under reasonable assumptions around revenue growth,” S&P said.

Ahead of a bond sale last year, the district’s pension revamp didn’t move Fitch or S&P to lift the negative outlook on the district’s AA-minus ratings as the district saw lingering COVID-19 hits and Fitch was waiting for the district to implement the pension legislation. Kroll Bond Rating Agency revised its outlook to stable from developing on the AA rating after the governor signed the legislation.

Moody’s Investors Service, which has not been asked to rate district deals for more than seven years because it links the credit off the city’s junk rating due to governance ties, revised its outlook last year on the Ba1 rating to stable from negative in tandem with its revision of the city’s outlook to stable.

The district operates 600 parks, 245 field houses, and 26 miles of lakefront property that combined cover 8,800 acres including the downtown Museum Campus that houses Soldier Field, the current home of the National Football League’s Chicago Bears.

The future of Soldier Field is in flux. The Bears are eying a move to the suburbs and Lightfoot last week pitched a major renovation including one option that would put a dome over the stadium with plans to explore how to cover the up to $2 billion cost.

Fitch does not address the potential impact of either a Bears move or a makeover of the district. The Illinois Sports Facilities Authority served as issuer for a makeover completed in 2003 and those bonds are repaid with hotel revenue taxes and a city and state subsidy. The Bears pay approximately $6.5 million per year in lease payments under a lease that runs through 2033 and the district otherwise primarily benefits from parking fees at Bears events.

The possible “Chicago Bears departure is not likely to have material credit impact,” S&P said. “Various alternate proposals for the use of Soldier Field are under consideration, the details of which — including how they will be financed — have yet to be made public.”

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