Oak Lawn credit rating hits junk status amid skyrocketing pension costs

Oak Lawn credit rating hits junk status amid skyrocketing pension costs

Massive increases in public safety pension contributions have failed to keep Oak Lawn’s credit from being downgraded to junk status. The Chicago suburb’s leaders are fighting cuts and tax increases, which are inevitable without pension reform in Springfield.

Oak Lawn, Illinois, will put nearly $10 million into its public safety pension funds in the coming year, or nearly $200 for every man, woman and child in the suburban Chicago community.

That still was not enough to avoid a junk credit rating.

“I don’t think you can find a community that’s done more than what we have,” Mayor Sandra Bury told the Chicago Tribune. “There are a lot of communities that have just given up.”

Moody’s Investors Service dropped the village’s credit rating to junk status Dec. 23, which followed several other downgrades in recent years. Oak Lawn boosted public pension spending seven-fold since 2011 to an amount equal to one-sixth of its general fund expenditures, according to the Tribune. But the village is still coming up short.

“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.

Pension costs and local government debt have been the No. 1 driver of Illinois property tax hikes since 1996. Those bills now stand as the second-highest in the nation.

Pension costs have also led to credit downgrades for dozens of communities across the state. From 2014-2018, Moody’s handed out 78 downgrades to Illinois cities, compared with just nine upgrades. Those downgrades make it more expensive for local governments to invest in projects residents want.

The rating change is not expected to have an immediate impact in Oak Lawn because village leaders have no plans to borrow, and Moody’s said Oak Lawn revenues are expected to remain stable. Still, Moody’s doesn’t expect the village to meet the state’s mandated minimum contributions until 2022 or 2023 and noted the potential for state revenues to be seized for the pensions as happened in East St. LouisHarveyNorth Chicago and is being pursued in Chicago.

Oak Lawn owed $168.5 million to its police and firefighter pension funds at the end of 2018, according to the most recent reports from the Illinois Department of Insurance. That’s more than $3,000 for every resident. The firefighters’ retirement fund had half of what it needed to meet obligations and the police fund was 46% funded.

Pension experts say pensions with funding lower than 60% should be considered “deeply troubled.” They say a 40% funding ratio may be a “point of no return,” after which a government cannot make required contributions or keep sufficient funding levels without painful cuts or serious structural reforms.

Leaders have been fighting against tax hikes or service cuts for the village’s 55,500 residents but are considering privatizing some services. Ultimately, Oak Lawn’s mayor said state lawmakers must change state laws governing pension systems so local governments can afford commitments to public service employees.

“I do want to honor the agreements we’ve made with our first responders and unions,” she told the Tribune. “But I feel it’s time that those benefits be more in line with the private sector moving forward.”

Illinois just passed a law that will consolidate the state’s nearly 650 local police and fire pension systems into two investment pools, but those amount to only 5.5% of the state’s total public employee pension debt. Plus, lawmakers boosted benefits for newer emergency workers without truly knowing the costs of the expanded benefits or whether the change was really needed to comply with federal law as some asserted.

For Illinois to truly manage its pension crisis, state lawmakers must amend the Illinois Constitution to protect earned benefits but allow for changes to future benefit growth. Failing that, Illinois municipalities and taxpayers face demands to pay more to receive less in services.

Want more? Get stories like this delivered straight to your inbox.

Thank you, we'll keep you informed!