Pension woes lead to Marengo debt rating drop
A troubling financial outlook prompted a rating agency to drop the City of Marengo's general obligation bond rating two notches recently, from AA to A+.
The S&P Global rating agency cited the city's failure to fully fund its pension obligations and its diminished ability to raise the tax revenue necessary to fund those pensions as reasons for the downgrade.
A lower rating signals greater risk to lenders and makes borrowing money more expensive.
“With Marengo, it was a number of years of underfunding the police pension,” Scott Nees, primary credit analyst at S&P, told the McHenry Times.
Nees said the agency also looked at the city's economy, which has been underperforming for several years.
“Marengo's single-employer police pension plan was only 28 percent funded based on GASB 68 at the end of the 2016 fiscal year, and the city has consistently underfunded its actuarially determined contribution (ADC) for multiple consecutive years,” Neese said.
The General Accounting Standards Board, or GASB, publishes reporting standards in its "Statement 68-Accounting and Financial Reporting for Pensions."
Nees warned that the weak economy and pension issues will make it difficult for the city to fulfill its obligations.
“They’re going to have a hard time meeting their future benefits,” Nees said.
The report considers Marengo’s economy to be adequate but also notes that its "per capita wealth and incomes are well below those of 'AA' rated credits, which, in addition to the city's pensions, also factored into our decision to lower the rating.”
The city's ability to raise money has been impacted by the Illinois' Property Tax Extension Limitation Law (PTELL), which restricts local authorities from increasing property tax rates above certain levels without voter approval.
“The problem is that they just don’t have the property tax-raising capability,” Nees said.
Despite praising Marengo's budgetary flexibility and strong liquidity, S&P warns of future downgrades if the pension problem is not addressed.
“We also, in addition to lowering the rating, put it at a negative outlook,” Nees said. “We think there is a strong possibility, a one-in-three chance, of a further downgrade in the next few years.”
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