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Chicago's solvency at risk as pension liability grows

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(Reuters) — Chicago's $20 billion unfunded public pension liability is on track to grow significantly regardless of the outcomes of litigation over the constitutionality of benefit cuts or legislative action, Moody's Investors Service said on Friday.

But the credit rating agency warned there will be a growing risk to Chicago's solvency if its four retirement systems start to run out of money due to legislative or court action allowing the city to avoid making higher pension contributions mandated by current Illinois laws.

Under those laws, Chicago's annual pension contributions will jump by 135% in 2016 — an amount equal to 15% of the city's 2013 operating revenue, Moody's said in a report. Contributions will increase 8% a year from 2017 to 2021, and 3% annually from 2022 to 2026.

"Without the increased payments that current statutes require of the city, the plans will continue to liquidate assets to pay benefits. As the plans approach insolvency, risks to the city's solvency will grow," the report said.

Moody's, which rates Chicago Baa2 with a negative outlook, added that while the higher contributions will place an enormous strain on Chicago's budget, the amounts will still be insufficient to cover annual interest accruing on the liabilities.

The Illinois Supreme Court is expected to rule soon on the constitutionality of a 2013 state pension reform law. The pending ruling has put on hold lawsuits challenging a separate 2014 state law that boosted contributions and cut benefits for Chicago's municipal and laborers' retirement systems. City officials have said that the high court's ruling should not impact the 2014 law.

Meanwhile, Chicago Mayor Rahm Emanuel has called for state legislation to give the city some breathing room for a $550 million contribution increase due next year to its police and fire pensions mandated by a 2010 law.

To keep pension payments at 10% of annual operating revenue, Chicago's revenue, which has been growing at an average annual rate of 1.5% between 2005 and 2013, would have to climb by 12% year over year, according to the rating agency.

"If city officials do not grow revenue or cut spending, net pension contributions are projected to consume 42% of operating revenue by 2026," Moody's said.