Chicago's pension payment conflict evolves into fight over timing

The debate over public pension funding continues to divide Chicago's mayor and city council, evolving into a question of timing after both parties settled on the amount.

After Mayor Brandon Johnson said he would split the city's $260 million advance pension payment in two ? paying half in January and half later ? more than 30 aldermen introduced a resolution on Wednesday calling for a special hearing of the finance committee.

In a statement, City Council members said the 2026 budget, which they passed over the mayor's objections and without his signature, included a "clear directive" to make the full advance pension payment to avoid further bond rating downgrades.

"Our obligation is to safeguard the city's long-term financial stability and honor the commitments made in the adopted budget," Finance Committee Chair Pat Dowell said in a statement. "The advance pension payment plays an important role in protecting Chicago's credit rating."

The resolution calls on the finance committee to convene a subject matter hearing on the city's cash flow situation ? which the Johnson administration cited as a reason to split the pension payment ? and the city's ability to comply with the 2026 budget's pension payment requirement in a timely fashion.

Aldermen had a meeting with the Johnson administration in late December in which they told the administration City Council wanted the full payment made in January, and didn't want to see the payment split up, Alderman Scott Waguespack said.

"At one point, they were saying, 'We're just not going to make it,'" he said. "There were confounding comments being made in meetings."

Waguespack said aldermen are worried about the message this sends to rating agencies, and upset that the mayor's team disregarded City Council's wishes.

"We're very concerned about what the rating agencies think," he said. "They expect stability and transparency, and they're not seeing that."

In a Wednesday press conference, Johnson stressed that aldermen "were fully aware" that because of Cook County's property tax billing issues, the city didn't start getting property tax distributions until December that would normally start coming in August. The city uses those property tax distributions to make its pension payments.

"This should not come as a surprise to anyone," Johnson said.

The amount of the pension payment was a key disagreement between the council majority and Johnson, who had proposed dialing back supplemental contributions to the city's underfunded pensions. The council budget that passed continued the supplemental funding trajectory that had helped lift the city's ratings.

Cook County's property tax bill delays have impacted local government cash flows, said Ashlee Gabrysch, Midwest region manager for local government ratings at Fitch Ratings, which rates Chicago A-minus with a negative outlook.

"However, Chicago's need to delay or potentially curtail the advanced pension payment points to the precarious nature of the city's finances, with the ongoing failure to right-size revenue and spending seemingly preventing the city from pulling the cash from elsewhere to extend the full payment," she said by email. "The full advance payment is an important stabilizer for both the pension funds and Fitch's view of the city's creditworthiness."

At the press conference, Budget Director Annette Guzman said the city has been making pension fund payments that would normally come from property tax distributions to prevent the funds from liquidating assets.

"We work really closely with the treasurer's office around our distributions throughout the year? At the end of last year, we were actually fronting a number of payments to the pension funds in particular because of the delay in property tax," she said.

David Levett, vice president of public projects and infrastructure finance at Moody's Ratings, noted that Chicago's largest pension system had to liquidate assets as recently as 2022.

"If the city's contribution timing in 2026 challenges the cash flow of its pension systems and forces them to again liquidate assets in order to continue paying benefits, the ability of its pension systems to meet their return targets would be diminished and the risk of asset depletion in those pension funds would rise," he said by email.

Moody's rates Chicago Baa3 with a stable outlook.

"A more pressing threat to the city's cash position would arise if negative budgetary variances emerge, given the budget's reliance on several items that face execution hurdles," Levett said.

"The city will remain in line with its pension funding policy if it makes the full payment within the fiscal year, as called for by the budget approved by the City Council," he said. Chicago's fiscal year coincides with the calendar year.

The mayor's team had foreshadowed the decision about the pension payment as recently as late last year, said Justin Marlowe, research professor at the University of Chicago's Harris School of Public Policy and director of the Center for Municipal Finance. So it's not shocking that Cook County's property tax woes would impact the city's pension payment.

"Those kinds of cash flow issues are baked into the city's current ratings," he said. "I don't know that it really moves the needle on the ratings or even investor perceptions."

At the same time, he said, the rating agencies pay very close attention any time a very large issuer starts to talk about cash flow problem.

"It suggests a governance problem," he said, noting that certain payments ? like the settlements for police misconduct and firefighter back pay, which the city is taking on debt to make ? "are knowable and can be planned for and budgeted are not being planned for and budgeted."

Marlowe said he doesn't expect rating agencies will feel compelled to act in this case.

"Absent any surprises, we won't see movement in credit quality or investor perceptions," he said. "But if the story about cash flow problems becomes attached to other parts of the budget, it will move the needle."

In their statement, the aldermen calling for a special hearing said the administration's explanation for the split pension payment is "in direct conflict with statements from the city's own budget director that the budget, as passed, included a $15 million surplus."

Waguespack said "we're pretty sure the cash flow is there" and that aldermen no longer trust what the administration is telling them.

It should not be necessary for this "to be playing out in the public way that it is," Civic Federation President Joe Ferguson said. "I don't think there's an appreciation for how you publicly manifest here as having an important impact on the credit rating agencies, on the market."

That it is suggests "significant dysfunction in the relationship between City Council and the mayor's office," he said. "This indicates that they are not talking to each other in the way that they should."

Ferguson noted that amid Council Wars, the bitter political warfare during Harold Washington's tenure as mayor in the 1980s, the city's credit rating dropped to junk status because of political dysfunction.

"There's real doubt about the administration's intentionality and willingness to really lean into the moment, and there is real mistrust on the part of the City Council," Ferguson said. "Credit markets and rating agencies should be closely monitoring (the situation)."

"Deferring or underfunding required payments may balloon liabilities, especially when equity market returns are weaker," Mohammed Murad, director of municipal credit research for PT Asset Management, said by email.

"The potential risk in deferring or underfunding is that the large liabilities start to compete for dollars intended for other purposes, such as public goods, and eventually may work their way into credit quality," he added.

Without proven execution of a plan to achieve acceptable funding levels, he said, "the market may not get comfortable."

Some investors may be wondering if the city will follow through on the second half of the payment, said Howard Cure, partner and director of municipal bond research for Evercore Wealth Management.

"It begs the question, if unforeseen events occur? would this second half payment still be made?" he said. "If it's not, there'll be downgrades from the rating agencies, and spreads will widen, if they haven't already."

He'll be looking at the one-time budget fixes in the 2026 budget, he said. "If those don't come through, will they make this other half of the payment?"

Cure said he'll also be watching how the City Council's newfound assertiveness affects the 2027 budget process, and if there will be funding cuts from the federal government or the state going forward.

"The advance pension payment was a good program, and was favorably noted," Cure said. "Analysts' and the bond market's antennae are up."

S&P Global Ratings assigns Chicago's general obligation bonds a BBB rating. S&P revised its outlook to negative in November. KBRA rates the city's GOs A-minus with a negative outlook.