Pension woes take toll on Illinois local government ratings

BY SourceMedia | MUNICIPAL | 07/12/18 07:04 PM EDT By Yvette Shields

CHICAGO – The western Chicago suburb of Forest Park became the fifth Illinois community since early last year to suffer a multi-level rating cut from Moody’s Investors Service with pension strains cited a key factor.

Moody's (MCO) dropped the village just west of Chicago three levels to Baa1 from A1. The downgrade earlier this month affects about $7.2 million of outstanding debt. The outlook remains negative.

The downgrade “is based on the village's weakened reserve position, structurally imbalanced operations and a high and growing pension burden.”

The village of about 14,000 residents has limited ability to raise local revenues and is dependent on uncertain state revenue sources. In its favor is a growing tax base and modest debt burden.

“The negative outlook reflects ongoing operating deficits," Moody's (MCO) said. "The village's pension contributions are also very weak relative to plan funding, pointing to further growth in its unfunded liabilities.”

Further draws on operating reserves, growth in its debt or pension burden, and a weakening of its tax base could drive further rating deterioration.

Pension strains have been a primary driver in 31 downgrades of Illinois municipalities by Moody’s since January 2017. Forest Park marks the fifth, multi-notch cut during that period, according to Moody’s data provided by spokesman Joe Mielenhausen.

Calumet Park slid to Baa1 from A2 last September. Danville fell to Baa2 from A3 in June 2017. Oak Lawn was dropped to Baa1 from A2 in February 2017. Flora lost its investment grade when it was cut to Ba1 from Baa2 in January 2017.

The pension strains of local governments have received heightened political, market, and rating agency scrutiny since the Illinois comptroller’s office put in place this year — as required under a 2011 law — a procedure allowing local public safety pension funds to intercept state collected revenues to cover shortfalls in pension contributions. Reports have found that hundreds of municipalities are behind on contributions and their funds could move to use the intercept. So far only Harvey’s police and firefighters’ funds and North Chicago’s firefighters’ funds have taken such action.

The Illinois Municipal Retirement Fund — a statewide fund that covers most general local government employees — has had the ability to intercept a single revenue source for a few decades and is currently intercepting funds from nearly a dozen municipalities.

It must now move to the same procedure that applies to the public safety funds, which makes available a pool of nearly all state collected funds like sales and gambling taxes. While the IMRF now has access to a wider pool of funds to tap, it will also have to compete with potential claims filed by public safety funds.

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