Pensions, debt push Oak Lawn toward ‘junk’ credit rating

Pensions, debt push Oak Lawn toward ‘junk’ credit rating

The Chicago suburb is facing severe fiscal challenges brought about by its unsustainable pension burden and $75 million in debt – a trend that has become too common among Illinois municipalities.

A middle-class southwest Chicago suburb’s pension and debt burdens are signaling future financial trouble to investors, meaning borrowing is likely to be more difficult for the village and more expensive for taxpayers.

The narrative is becoming too common in Illinois, where pension debt is eating money that should be spent on police, fire and other community services.

The credit rating for the village of Oak Lawn sits just one notch above “junk” status after a downgrade on Oct. 10 from Moody’s Investors Service. Moody’s knocked the village’s rating down to Baa3 from Baa2, and indicated a bleak forecast by assigning the village a “negative outlook.”

Moody’s attributed Oak Lawn’s credit slide to a “heightened operating risk” posed by its “high and growing pension burden,” with bond debt standing at $75 million. Moody’s stated the village runs the risk of state interception of tax revenues because pension contributions are failing to keep pace with the minimum funding levels required by state law. Oak Lawn’s police and fire pensions posted unfunded liabilities of $154 million at the end of 2017.

Since the state’s pension intercept law took full effect this year, the state comptroller has garnished tax dollars from the nearby suburbs of Harvey and North Chicago, forcibly redirecting those revenues to the cities’ deficient police and fire pension funds. Crowding the city’s budget, pension growth forced Harvey into mass layoffs of police and firefighters. The city of Chicago, too, risks state intervention because of pension funding inadequacy: The city’s fire pension fund filed a claim with the comptroller for a $3.3 million shortage.

Oak Lawn could very well face the same fate as Harvey and North Chicago.

But Oak Lawn is significantly different from Harvey, where a history of corruption and poverty intensified its fiscal crisis. Instead, Oak Lawn’s current challenges warn that Illinois’ system of defined-benefit pensions for government workers is simply unsustainable, even for communities with a relatively healthy economic base.

What’s worse, the same pension issues facing Oak Lawn and other municipalities weigh on the state as a whole. In August, Illinois earned the distinction of worst debt-to-revenue ratio in the nation when Moody’s reported unfunded pension liabilities equaled 601 percent of state revenues – breaking a national record. A recent Mercatus Center study pegged Illinois’ budget health as worst in the nation, citing massive debts for government worker health insurance and pensions, among other problems. Both Oak Lawn and the state share the near-junk credit rating.

Mounting pension pressure has placed severe constraints on municipal budgets across the state, compromising the ability of local governments to improve public services – while subjecting residents to tax hikes. That’s an unfair arrangement for taxpayers: As pensions consume a larger share of the budget, forcing local governments to raise taxes or fees to keep pace, residents are effectively paying more in tax dollars to receive fewer services.

In Cook County, where Oak Lawn is located, homeowners pay nearly double the national average effective property tax rate, according to ATTOM Data Solutions. But Oak Lawn and other south suburbs fare even worse than the Cook County average. The average 2017 property tax bill – payable in 2018 – for a south suburban home with a $200,000 market value was nearly $5,900, surpassing Chicago and the north suburbs’ $3,600 and $4,600 average bills, respectively, according to the Chicago Sun-Times.

Oak Lawn’s tax burden may already be driving residents out. The suburb has been slowly declining in population, having lost more than 1 percent of its residents since 2010, according to U.S. Census Bureau data.

The median household income in Oak Lawn is $58,707, close to the statewide median of $59,196. And while the village’s property tax pain is shared across other middle-class communities in Illinois, Oak Lawn’s recent credit rating downgrade signals a particularly urgent need for reform.

Unfortunately, the Illinois Supreme Court’s strict interpretation of the Illinois Constitution’s pension clause has reversed even the most modest reforms. In order for the state to restore local control over municipal budgets – and deliver relief to taxpayers – Illinois must amend the state constitution’s pension clause to allow for changes to unearned, future benefits – while protecting benefits already owed. To reduce pension liabilities, reforms should aim to achieve the following:

  • Increasing the retirement age for younger workers, to bring them in line with private-sector retirement ages
  • Capping maximum pensionable salaries to limit excessive pensions
  • Replacing permanent compounding benefit increases with true cost-of-living adjustments, or COLAs
  • Implementing COLA holidays to allow inflation to catch up to past benefit increases
  • Automatically enrolling all new government employees into 401(k)-style retirement plans

Defined-benefit pensions have failed both government workers and taxpayers, imperiling the former’s retirement security while tethering the latter to massive, unpredictable costs. Unless state lawmakers muster the political will to amend the Illinois Constitution, pension contributions for yesterday’s retirees will continue to cast uncertainty over today’s government workers and local taxpayers.

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