CHICAGO, March 28 (Reuters) - Chicago's low-investment grade credit rating could be at risk if the city is unable to boost funding for two of its pension funds starting this year, S&P Global Ratings said on Tuesday.
The warning came after Illinois Governor Bruce Rauner vetoed a bill last week that would have allowed Chicago to ramp up payments to its municipal and laborers' retirement systems over five years. The measure, which cannot be subject to a veto override vote because it was passed in the previous legislative session, was aimed at preventing the funds from running out of money within 10 years.
"Timely action on pension funding is crucial to the city's budgetary stability," S&P said, adding that delaying increased pension contributions beyond 2017 "could lead to credit deterioration."
Credit ratings for the nation's third-largest city have been weakening due largely to an unfunded pension liability that stood at $33.8 billion at the end of fiscal 2015.
S&P revised the outlook on Chicago's BBB-plus general obligation bond rating to stable from negative in October, citing the city's passage of a tax on water and sewer usage to raise money for its largest pension fund covering municipal workers.
Chicago also increased a telephone surcharge to aid the laborers' system. Molly Poppe, a city spokeswoman, said on Monday that the revenue earmarked for pension payments is being held in an escrow fund as Chicago awaits final action on an identical bill that passed the Senate in January and is currently pending before a House committee.
The Republican governor on Monday told reporters that the city's pension fix lacks fundamental restructuring of retirement costs and will result in a big balloon payment in 2023.
S&P said the latest bill is likely to receive enough votes to overturn a subsequent veto based on strong bipartisan support for the original measure. But it noted that Chicago must still come up with additional money for pensions in 2023 when larger contributions will be needed.
"We anticipate that the city will still take tangible steps to address near-term pension pressures, but in the absence of additional measures to ensure the affordability of the contributions and the sustainability of the plan, credit stability could be short-lived," the credit rating agency said. (Reporting by Karen Pierog; Editing by Matthew Lewis)