Moody’s Drops Chicago Suburb Oak Lawn to Aa3 After Deficits

CHICAGO — Moody’s Investors Service downgraded the Chicago suburb of Oak Lawn to Aa3 from Aa2, warning that the village faces a series of fiscal challenges after two years of operating deficits.

Oak Lawn plans to enter the market next week with $32 million of new money, taxable Build America Bonds and refunding bonds. The transaction will refund more than one-third of its outstanding debt, which totals $83.3 million.

The village benefits from its proximity to downtown Chicago, which is 15 miles away, and traditionally has enjoyed an annual growth rate of more than 7%, Moody’s said.

However, Oak Lawn has struggled to cap labor expenses in recent years. The rating cut comes after two years of general fund operating deficits tied largely to salary and overtime costs as well as overly optimistic revenue projections, analysts said.

The operating deficits have lowered the village’s general fund balances and cramped its financial flexibility. Oak Lawn ended fiscal 2009 with a $2.7 million general fund operating deficit that brought reserves down to $1.2 million, or 3% of general fund revenues.

“Positively, the village has implemented a series of expenditure reductions and more conservative revenue estimates, which management believes will yield a $500,000 general fund operating surplus at the conclusion of fiscal 2010,” analyst Mark Lazarus wrote in the downgrade report. 

Oak Lawn’s top revenue sources are sales taxes, an economically sensitive source that accounts for 29% of operating revenue, and property taxes, which account for just under 28%.

The village is considerably ­strengthened by its status as a home-rule government, which allows it to enact a number of revenue-raising options that support the credit, Moody’s said. For example, Oak Lawn village officials imposed a 3% vehicle fuel tax increase in January that is projected to raise $660,000 annually to finance street improvements. The village may also impose unlimited property tax hikes.

Proceeds from the bond sale will finance a variety of capital projects, including water and sewer upgrades, street resurfacing and drainage.

Standard & Poor’s rates Oak Lawn A-plus with a stable outlook. Fitch Ratings does not maintain an underlying rating on the village. Oak Lawn has no immediate plans to issue more debt after next week’s sale.

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Illinois
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