Cook County’s debt downgraded: pension liabilities double under Moody’s new methodology

Chicago’s fiscal crisis just got worse. Last month, the city received a rare triple-notch downgrade from Moody’s Investors Service, to A3 from Aa3.  Now, Chicago’s parent government, Cook County, has received a downgrade of its own. Moody’s Investors Service downgraded Cook County’s general obligation bond rating to A1 from Aa3 due to the county’s “growing...

Chicago’s fiscal crisis just got worse. Last month, the city received a rare triple-notch downgrade from Moody’s Investors Service, to A3 from Aa3.  Now, Chicago’s parent government, Cook County, has received a downgrade of its own.

Moody’s Investors Service downgraded Cook County’s general obligation bond rating to A1 from Aa3 due to the county’s “growing pension liability.”

The county’s official 2012 unfunded pension liability stands at $5.6 billion. But Moody’s, using its new, more realistic investment return assumptions, has calculated an unfunded pension liability of $12.7 billion.

Moody’s has long critiqued the use of overly ambitious investment return targets that allow funds to understate their true pension shortfalls. Moody’s recently began using a new methodology with more conservative investment assumptions. When Moody’s applied this methodology to Cook County’s 2012 pension shortfall, it found that the shortfall jumped more than 126 percent.

The ratings agency also said it was keeping its negative outlook, warning that more downgrades are imminent if Cook County – the second-largest county in the nation – doesn’t institute reforms.

An additional factor cited was the fact that 50 percent of Cook County’s tax base is located in Chicago, which just suffered its recent triple-notch downgrade due to massive pension liabilities.

Cook County’s crisis is no different from what Chicago, the state and numerous localities in Illinois are experiencing – out-of-control pension debt.

Without real reforms, pension costs threaten to bring down Illinois.

It’s time for Illinois to follow the lead of the private sector. That means moving away from defined benefit plans and embracing 401(k)-style plans going forward. Today, more than 80 percent of private sector workers are covered by defined contribution plans such as 401(k)s.

States have also begun to move in that direction. Michigan converted all new state workers to 401(k)-style plans in 1997. Alaska did the same in 2006. Even Democrat-controlled Rhode Island, with the nation’s second-worst funded pension system, moved to a new pension system that is based around a defined contribution component  in 2011.

Illinois and Chicago must modernize their retirement systems by adopting defined contribution plans, such as the ones found in House Bill 3303 and Senate Bill 2026.