CHICAGO -- Marengo, Illinois took a two-notch rating hit and faces the prospect of another as it struggles with underfunded pensions.
S&P Global Ratings on Monday downgraded the city in northeastern Illinois to A-plus from AA and assigned a negative outlook.
"The downgrade reflects our view of the city's large and growing unfunded pension liability, in conjunction with a limited ability to raise additional revenues with which to address the liability," S&P wrote.
Marengo's single-employer police pension plan was only 28% funded with $12.2 million of net pension liabilities at the end of the 2016 fiscal year and the city has consistently underfunded its actuarially determined contribution for multiple consecutive years. The city faces a state mandate to bring its police plan to a 90% funded by 2040.
The city must deal with its pension ills against an economic backdrop that is relatively weak compared to other double-A rated credits, adding to the challenges of finding additional revenue to deal with rising pension costs.
"We believe that absent a credible plan to address its pension obligations, further credit erosion is possible in the near term," S&P wrote. "If the city's structural deficit continues unaddressed, we could lower the rating further and potentially by multiple notches."
The city ended its last fiscal year with a 1.9% general fund deficit. The city's fiscal 2017 budget was structured for break-even results, and management's most up-to-date forecast shows a $77,000 shortfall. The city will underfund its ADC by about $262,000. If the full payment were made, the fiscal 2017 shortfall would balloon to 7.8% of estimated expenditures.
The city's property tax levy accounted for about one-third of general fund revenues in fiscal 2016, while various intergovernmental revenues accounted for 43% and utility taxes 13%. The revenue streams have been mostly flat and are not projected to increase significantly, which in turn could make the problem of rising pension costs less manageable over time, analysts said.
The city of 7,740 is in McHenry County about 65 miles northwest of Chicago and 30 miles east of Rockford.
Marengo's struggles are symptomatic of those seen by other Illinois municipalities with respect to their public safety pensions as many are struggling to meet rising payments due to the state mandate. The Illinois Municipal League is pressing lawmakers this year to pass legislation merging some public safety pension fund functions and investments among the 663 individual local government public safety pension funds with the goal of reducing costs.
Marengo participates in the Illinois Municipal Retirement Fund for its general employees and that is among the strongest funded state-related pension funds.