Chicago suburb cut to junk over pension woes

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The Chicago suburb of Oak Lawn lost its investment grade rating this week over pension strains that leave it open to the state’s garnishment process.

The cut to Ba1 from Baa1 by Moody’s Investors Services marked the latest in a series of local Illinois government rating downgrades this year with pension woes serving as a primary driver and it comes as the state’s plan to consolidate public safety funds outside Chicago is beginning.

At the lower level, Moody’s revised Oak Lawn’s outlook on $70 million of general obligation unlimited tax bonds to stable from negative.

“The downgrade to Ba1 reflects credit risk stemming from public safety pension contributions that are materially below state mandated levels that leave the village susceptible to diversion of state shared revenue coupled with a weak cash position across its major operating funds,” Moody’s wrote in the Dec. 22 report.

Oak Lawn benefits from strong revenue raising flexibility and a solid economic base with proximity to Chicago to draw from to address a growing pension burden and rising fixed costs. “The village has made revenue adjustments that have accommodated substantial increases in contributions, but significant further budget adjustments will be needed to come into compliance with state minimum funding,” Moody’s said.

The village of 56,000 located about 20 miles southwest of downtown could have its investment grade status restored by reducing liquidity risk through significant and sustained fund balance improvements and / or contributions to public safety plans consistent with state law. Diversion of state revenue to its pension funds that creates additional operating pressures could trigger further credit erosion.

Several years ago lawmakers amended the state’s pension code to allow for local pension funds to divert its sponsoring government’s share of state-related tax funds to cover a shortage in actuarially based contributions by filing a claim with state Comptroller Susana Mendoza’s office. Mendoza put the enforcement mechanism into action last year.

So far, pension funds that represent public safety workers in East St. Louis, Harvey and North Chicago as well as all four of Chicago’s pension funds have sought to garnish the local municipality’s share of state tax funds. In Chicago’s case its state grants that have been diverted as the pension code is slightly different for the city.

The Illinois Municipal Retirement Fund, which covers non-public safety workers outside Chicago and Cook County, also has used the law on a handful of municipalities behind on their contributions.

While many other local governments may be behind on actuarially based payments, it’s up to the pension funds to file a claim, and some are reluctant amid warnings of potential service cuts or layoffs.

While local governments are clamoring for pension help, the only action to date at the state level has been passage of legislation consolidating the assets of about 650 local police and firefighter funds into two funds – one for police and one for firefighter.

Gov. J.B. Pritzker’s special task force on consolidation recommended the change and lawmakers approved it during their annual fall veto session.

“Working together, we are helping hundreds of cities in Illinois alleviate their spiraling property tax burdens, and just as importantly, we’re showing that Illinois can tackle its most intractable problems,” Pritzker said when he signed the legislation on Dec. 18.

The task force believes the consolidation can generate between $850 million and $2.5 billion in additional investment returns over the first five years and $3.6 billion to $12.7 billion through the 20-year scheduled ramp up to a 90% funded mandate in 2040 by pooling assets. About $160 million of savings are expected by trimming administrative costs, according to the state budget office.

Local pension boards will continue to administer pension benefits. No assets or liabilities will be shifted from one local pension plan to another.

Market participants who follow local Illinois government credits and the state see the change as a having a modest improvement, with the impact limited by the weak funded ratios of many of the state’s public safety funds.

The change does nothing to address Chicago’s $30 billion of net pension liabilities and the state’s $137 billion unfunded pension tab. Benefit cuts are not an option as they violate the Illinois constitution.

The roughly 650 systems that are referred to as “downstate and suburban public safety pension funds” carried $11 billion of unfunded liabilities in 2017 — up from $10 billion a year earlier — with an average funded ratio of just 55%, according to a report this year from the Illinois Department of Insurance. The new police fund would have more than $8 billion assets to invest and the firefighter fund more than $6 billion.

The low funded ratios and a mandate to make actuarial contributions has strained some local government coffers, driving rating downgrades and steep property tax hikes. The city of Alton sold off a utility system to boost pension funds.

Moody’s has downgraded a handful of other local governments this year over pension strains. Moody’s last month dropped East Moline to A3 from A3 and the outlook remains negative as pension and retiree healthcare obligations are pressuring operations and hitting reserve levels.


Moody’s in September cut Rock Island’s rating to A3 from A2 in September, a move that “reflects the city's high and growing pension burden and ongoing budgetary pressures that will be exacerbated by increasing fixed costs to service those liabilities.”

Moody’s cut Rockford’s rating to A3 from A2 in September, primarily due to the “city’s elevated and growing pension burden.” Earlier this year Moody’s cut Mundelein’s rating to Aa3 from Aa2 due to narrowing liquidity and a growing pension burden.

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Ratings Public pensions State and local finance Illinois
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