Fitch Ratings downgraded the general obligation bond rating of Cook County, Illinois, from AA to AA- earlier this week. Moody’s similar downgrade last June makes this Cook County’s second downgrade of the year.
It is of no surprise that the county’s pension liabilities were cited as an important factor in the downgrade. Cook County’s local governments currently face more than $108 billion in outstanding debt, almost a quarter of which can be attributed to unfunded pension liabilities.
This problem is further compounded by the fact that the City of Chicago has its own unfunded pension liability of $48.8 billion or $42,000 per capita.
Illinois’s pension problems, however, run much deeper than Cook County. Illinois’s FY 2012 operating budget reports that the state’s pension system is 45 percent funded with total unfunded liabilities amounting to $75.7 billion.
Although, in recent research, Eileen Norcross and I find that when using discount rates that reflect the risk of public pension liabilities, Illinois’s unfunded pension liabilities amount to $173 billion and the funded ratio across systems drops to 36 percent in FY 2010.
By 2018, Illinois pension system will require a tripling of the state’s annual contributions from $6 billion to $17.5 billion. Therefore, without serious structural reform, it is likely that Illinois’s pension liabilities will lead to additional rating downgrades in the future.