Marengo pension shortfall brings credit rating plunge
A lack of funding for the city's police pension and a bleak economic outlook have combined to knock the credit rating of the the City of Marengo down two notches, according to Standard & Poor's (S&P) latest ratings.
The financial services company now rates the city as "A+," down from its previous rating of "AA" and reflecting a more negative outlook for its financial future. The city of 7,740 residents is 65 miles northwest of downtown Chicago and 30 miles east of Rockford in McHenry County.
In his report, S&P Global Ratings credit analyst Scott Nees said the downgrade is based on recent developments combined with an anticipated lack of funds coming into Marengo.
"The downgrade reflects our view of the city's large and growing unfunded pension liability, in conjunction with a limited ability to raise additional revenues with which to address the liability," he said. “In particular, Marengo's single-employer police pension plan was only 28 percent funded based on GASB (Government Accounting Standards Board) 68 at the end of the 2016 fiscal year, and the city has consistently underfunded its actuarially determined contribution for multiple consecutive years, which, in our view, makes further acceleration of the plan's already elevated annual costs more likely.”
Nees also said further credit erosion is likely soon, especially if nothing is done to take care of the pension obligations.
“The negative outlook, accordingly, reflects our view that there is at least a one-in-three chance of a further downgrade in the next two years should pension pressures go unaddressed,” Nees said.
Nees said the rating could in fact be lowered multiple notches if Marengo shows a structural budget imbalance that, if not addressed immediately, increases the the likelihood of further deterioration of the city’s finances.
“We could revise the outlook back to stable if the city takes meaningful steps to put its pension funding on a sustainable course, while demonstrating progress in bringing its expenditures, including pension costs, into alignment with its recurring revenues,” he said.