Pension & OPEB Costs; The Struggle Continues

The City of Chicago is making plans to phase out a majority of its retireehealthcare costs by 2017 in order to reduce an annual expenditure line item that currently stands at $108 million.  If left unchanged the City’s plan would represent an unfunded $2.1 billion liability, with an annual cost that is projected to grow to $307 million in 2018 and $541 million by 2023.  This compares to $8 billion in outstanding general obligation debt and $16.7 billion in unfunded pension obligations.  The City has proceeded cautiously in an attempt avoid litigation with unions, though they are said to be are weighing their options. Last year, the State of Illinois’ changes to OPEB benefits were upheld in circuit court, but the decision is pending appeal.  Contrast these decisions with those of  Allentown, PA, which has agreed to a 50-year lease of its water and sewer system, a deal that includes an upfront payment of $220 million.  This action eliminated the need to issue pension bonds to fund its plan.  While this is a one-time option, we are encouraged to see that municipalities are taking steps to combat these long-term liability funding issues, though our preference is for the Chicago-style fix, as it reduces costs and the potential for additional increases in the future.  SNW Asset Management continues to view the off-balance sheet liability issue as a serious concern for many issuers across the county and will stay vigilant for those entities not dealing appropriately with the problem.