Chicago suburb inches toward junk over pension woes

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CHICAGO — The southwest Chicago suburb of Oak Lawn is at risk of losing its investment grade over the weight of its pension burden and the risk its pension funds could move to intercept its share of collected revenue to make up for contribution shortfalls.

Moody’s Investors Service cut Oak Lawn’s rating one notch to Baa3 from Baa2 and assigned a negative outlook. The village has $75 million of outstanding debt.

“The downgrade to Baa3 is based on heightened operating risk associated with the village's high and growing pension burden,” Moody’s wrote.

The village’s current contributions don’t meet an actuarial level as required under state law and so it could face the diversion of state collected funds such as its share of local sales taxes and income taxes if sought by the funds. The intercept was included in previously approved state pension legislation and the state comptroller earlier this year began enforcing it.

Several public safety funds have requested such a diversion — most notably the south suburb of Harvey, which subsequently reached a legal settlement with its police and firefighters’ funds splitting its share of state collected revenues.

While local governments have their own individual public safety funds, most outside Chicago participate in the healthier Illinois Municipal Retirement Fund to cover general employees. The IMRF can now intercept state funds and it has moved on a handful of local governments to do so.

“While such a diversion is reportedly not imminent, such risk is heightened by the village's limited reserve position,” Moody’s said.

The village does have some budgetary flexibility due to declining debt service costs and certain operating revenues designated for capital that could be redirected to operations. It also enjoys broad legal flexibility to raise local taxes on its moderately sized tax base with an average demographic profile and moderate debt burden.

“The negative outlook reflects our expectation that, although village actions to increase pension funding will slow the rate at which unfunded liabilities are growing, plan status will continue to worsen and potentially strain the village's budget over the next several years,” Moody’s said. “The outlook also considers the direct risk to liquidity created by current funding levels given the village is not in compliance with state law.”

The village is considered an inner ring suburb about 20 miles southwest of downtown with a population of about 56,000.

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