A Chicago suburb is cut four notches over pension burden
CHICAGO — The southern Chicago suburb of Oak Lawn took a four-notch rating cut over budget and pension strains.
S&P Global Ratings dropped the village’s rating to BBB from A-plus and assigned a negative outlook.
The village has $75 million of outstanding debt.
"The lowered rating reflects our view of the structural imbalance in the village's budget and the very weak funding levels in its police and firefighter pension plans," said S&P analyst David Smith.
The village's failure to adhere to an actuarially required payment under state law also raises the risk that its pension funds could petition the state to withhold the village’s share of state-collected revenues under an intercept mechanism that took effect earlier this year.
The village had operating deficits of negative 13.6% of expenditures in the general fund and negative 7.5% across all governmental funds in fiscal 2017. The village underfunded its police contribution by $2.9 million and its firefighters fund by $1.7 million, making just 68% of what was actuarially owed.
The village forecasts a $1.4 million fiscal 2018 general fund surplus, but S&P noted that the village does not expect to fully fund the actuarially determined contribution to its public safety fund “which will artificially inflate budgetary performance.”
“While the village has adopted a pension funding policy, which commits it to higher contributions in coming years by an increasing amount of $500,000 annually, we believe this plan is insufficient given the magnitude of the village's ADC deficiency,” S&P said. The village's police fund has a net pension liability of $70 million and is 53% funded while the fire fund has a $63 million tab and is 55% funded.
The negative outlook reflects the village's continued and significant pension underfunding expected over the next two years, according to S&P. A downgrade could occur should the village continue to experience budget imbalances as well as significant shortfalls on its actuarially determined pension contributions.
Other factors influencing the village’s rating include an adequate economy with access to the Chicago metropolitan region and adequate liquidity. Overall, the village's market value grew by 15.5% over the past year to $3.6 billion in 2018.
Moody’s Investors Service last month cut Oak Lawn’s rating one notch to Baa3 and assigned a negative outlook based on heightened operating risk associated with the village's high and growing pension burden. Moody's has downgraded more than 30 Illinois municipalities this year with pensions a primary driver.
The village, considered an inner ring suburb about 20 miles southwest of downtown Chicago, has a population of about 56,000.