S&P holds Berwyn, Illinois' ratings steady as it joins stream of POB borrowers

Berwyn, Illinois’ ratings remain intact after a review ahead of its $99 million general obligation debt refunding, restructuring and new money issue that will provide budgetary relief and pay down unfunded public safety pension liabilities.

S&P Global Ratings had put the city’s BBB GO and A-minus securitization ratings on CreditWatch with developing implications Sept. 30 as it reviewed the planned deal’s impact on the city’s credit profile. The rating agency affirmed the ratings and stable outlook earlier this month.

The suburb located just southwest of Chicago is planning a $91.6 million A series and $7.5 million B series.

"The CreditWatch removal reflects our assessment of the city's credit profile, inclusive of its pension funding and debt restructuring plans," said S&P analyst Andrew Bredeson.

The city will restructure about $18.2 million of existing GOs. Bond proceeds will also allow the city to fully fund its unfunded actuarial accrued liability for its police and firefighter funds joining a wave of local Illinois government borrowing to manage the rising tab to make required pension contributions. The city will also put $2.9 million in cash from its debt service fund toward the restructuring.

“The restructuring will provide the city with upfront savings and budgetary relief in the near-term, while extending the amortization period to 2042 from 2031,” S&P said.

The city’s police fund carried $37 million of unfunded liabilities and was 73% funded while the firefighters fund was at $40 million and 62% funded, according to a report on the more than 600 local government public safety pension funds based on 2019 actuarial reports published by the Illinois Commission on Government Forecasting and Accountability.

The unfunded tab for the 295 firefighter funds and 352 police funds outside of Chicago grew to $13 billion in fiscal 2019 from $12.3 billion in 2018 and $11.5 billion in 2017. Police accounted for $7.5 billion of the total and firefighters for $5.5 billion, according to the COGFA report.

The city will fully fund its police and fire funds but S&P said they remain at risk.

“While we note the city has adopted somewhat more conservative pension funding assumptions than is standard for the state, we believe assumptions remain somewhat optimistic,” S&P said. “In addition, the city has not consistently made its full actuarially determined contributions in recent years, instead opting to issue long-term debt to fund pension liabilities.”

The Dec. 17 affirmation extends to the city’s $80 million of A-rated Berwyn Municipal Securitization Corp. 2019 bonds.

"The rating reflects strong coverage based on a 2.0 times maximum annual debt service additional bonds test, with recent years of very strong pledged revenue growth that continue in 2020, despite the ongoing COVID-19 pandemic," Bredeson said.

A combination of securitized sales and income tax revenues secure the 2019 bonds. The state, at Chicago’s behest, created the securitization structure that allows local home rule units of governments to establish a bankruptcy-remote special purpose entity to issue debt secured by revenues that flow from the state, like some sales taxes, shared income tax revenue, motor fuel and others.

Under the lockbox structure, the pledged revenues go directly to the corporation, insulating it from a local government’s own fiscal stresses, which in turn allows governments to fetch higher ratings than their GOs attract.

Berwyn pledged to the securitization both sales tax and income tax revenues the state hands over to local governments through the Local Government Distributive Fund, which the state has made cuts to in past year.

The securitization bonds survived the early strains posed by the COVID-19 pandemic last year as sales taxes quickly bounced back and the state held income tax revenue sharing levels steady as its tax revenues recovered and federal relief offset pandemic costs.