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Evanston aldermen failed to agree Tuesday night on how much the city should set aside for public safety pensions and how to pay for it.

The debate arose because, after years of forecasts of constantly increasing pension payments as far as the eye could see, the city’s actuary recommended a reduction in next year’s payment.

Actuary Arthur Tepfer said the city would be justified in spending roughly $700,000 less next year on pensions than the $14.9 million it set aside this year.

But he conceded that payments required to close the $153 million pension funding gap are likely to increase substantially in future years, unless today’s low interest rates rise dramatically.

Alderman Don Wilson, 4th Ward, argued for again spending $14.9 million on pensions next year.

Wilson compared it to a family paying an extra $200 a month on their mortgage to gradually reduce what they’d owe in interest in the future.

And Alderman Coleen Burrus, 9th Ward, said the city got into its pension funding mess nearly three decades ago by listening to actuaries who underestimated needed pension funding amounts.

But Alderman Ann Rainey, 8th Ward, who’s been on the council for over two decades, argued that residents couldn’t afford the added tax burden of the higher pension payment.

No specific proposal won majority support at the meeting.

Four aldermen — Wilson, Burrus and Judy Fiske, 1st Ward and Mark Tendam, 6th Ward  — favored keeping the pension payment at this year’s level, as did Mayor Elizabeth Tisdahl.

Two — Rainey and Peter Braithwaite, 2nd Ward — would only support funding at the $14.2 million level recommended by the actuary.

Three —  Jane Grover, 7th Ward, Delores Holmes, 5th Ward, and Melissa Wynne, 3rd Ward — were willing to support a figure somewhere in between, but failed to win majority support for any specific number.

City Manager Wally Bobkiewicz said that he will included spending and revenue options in his budget proposal next month that will let the aldermen decide how they finally want to resolve the pension funding question and how to pay for it.

Top: Actuary Arthur Tepfer speaking to the City Council.

Bill Smith is the editor and publisher of Evanston Now.

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9 Comments

  1. How can this even be a subject for discussion?

    We consistently underfund our growing pension debt.  Historically, actuarial analysis has been dead wrong.  Assuming a 6 or 7 percent return is laughable.  Please be adults and make a decision to appropriately fund pension liabilities.  If that does not happen, the situation will only get worse, not better.

    And BTW, I am not a supporter of these outsized pensions.  But the liability is there.  We should do what's right and address it so that the burden does not grow and increased tases/fees passed on to future citizens.  

    Act like the responsible aldermen you are supposed to be.

     

     

  2. Why Evanston needs to pay more into pension funds

    Please find my comments from last night.

    To summarize:

    – Evanston’s Police and Fire pension funds are poorly funded today with a 54% unfunded liability
    – Demographics are a headwind as reflected by the growing pension payments projected over the next 30 years
    – Recent accounting changes announced by GASB will further increase the unfunded liability
    – Future returns on assets will likely be lower than projected

    Here is the complete text of my comments – please respond with questions or comments:

    Good evening. My name is Jim Young and I would like to thank you for giving me the opportunity to address City Council this evening. And thank you Mayor Tisdahl for providing me with some extra time. Some of you may recall that I served on Mayor Morton’s Police & Fire Pension Committee in 2008. Tonight I am here as a private citizen since our group’s work ended in October 2008 after we published our report.

    My request is that you maintain funding for Evanston’s Police and Fire Pension Funds at least at last year’s level, but under no circumstances would I suggest that you lower funding.

    The current unfunded liability for the Police Fund is $86.2mm or 54%. The Fire Fund is unfunded by $ 66.6 mm or 54%. Said another way, the “Pension Debt” just for the Police and Fire Funds is $152.8 mm.

    Evanston’s Police and Fire Pension situation is very precarious, and contributing less money is irresponsible in my opinion. If the unfunded liability was 20% or less and other conditions were improving, I would have a different opinion. To reiterate, the Police and Fire unfunded liability is about 54% – we’re on thin ice. Due to a variety of reasons, we’ve basically put our current police and firemen, all of their retirees, and taxpayers on the ice in Lake Michigan, and it’s spring time. This is dangerous.

    As I learned about pensions in Evanston starting in March 2008, and became aware of the growing problems at Cook County, City of Chicago, and the 5 State pension funds, I have become concerned, angry, disappointed, appalled, disgusted, and depressed.

    The irresponsible actions taken, and the adolescent behavior by our elected officials is a travesty.

    The only good news is that the public has become aware of the gravity of the situation and as Daniel Biss has correctly stated, “It’s a math problem.” I give Daniel huge kudos for his maturity, willingness and ability to forge constructive change on pension issues in Illinois.

    Evanston’s pension situation will likely get worse in the near future. Why? Demographics are working against the fund. More and more policemen and firemen are going to retire in the next 5-10 years.  In fact, there are 18 police officers who are currently eligible to retire, that’s today, and another 15 officers in the next 5 years will be able to retire. That’s 20% of the active policemen. In 2013 payments for Police & Fire benefits are estimated at $16.8mm. Funds contributed by active Police & Firemen plus the current amount recommended by the Actuary are $16.4mm – There’s not much room for error. In 10 years total payments are projected to grow to $21.4mm, up from this year’s $16.8mm. So in 10 years, annual payments are scheduled to increase 27%, and they continue to increase every year for almost another 20 years.

    Second, the Government Accounting Standards Board (GASB) recently passed new guidelines which is going to increase the unfunded liability (GASB 68 & 69).

    Third, both pension funds currently assume a 7% rate of return. This is likely too high by at least 1% and more likely 2%, but it could even be lower. Bill Gross from PIMCO stated in his August commentary that in the future, bonds will return 2% and stocks 4%. So his 3% blended return is a far cry from the 7% currently assumed. Look at the returns these funds earned from 1998 – 2007, barely over 6%.  Appendix D, page 22 from our Pension Report. Since the financial collapse in 2008, the Police Fund generated a 3.7% annualized return, and the Fire Fund generated a 3% annualized return.

    A common mistake people are making is they’re extrapolating historical investment returns from 20, 30 years ago into the future. But here’s the problem. 30 years ago, the 10 year bond peaked at over 15%, and today it’s about 1.8%. We have just enjoyed one of the biggest bull markets in bonds in history. Mathematically these returns can’t happen again in the foreseeable future. Also, think about what the Chairman of the Fed just announced last week. Chairman Bernanke said that short term rates would be on hold until at least through mid 2015, and he announced QE3. These announcements suggest to me and many others that Mr. Bernanke and others are very concerned about our economy. From an investment perspective, this means we’ll be earning close to 0% on our cash for the next 3 years and investment returns across fixed income assets are pulled down due to these policies, while stocks experienced a recent gain.

    Remember that both the Fire and Police funds have significant investment restrictions which effectively limits their holdings to stocks, bonds, and cash.

    All of my comments pertain to the current pension benefits agreed to, and the current structure of 630+ independently managed police and fire funds throughout Illinois. Both issues warrant a separate and thorough consideration to ensure that all police and firemen receive a fair and sustainable pension and taxpayers are treated equitably.

    This City Council has a moral and ethical responsibility to appropriately fund the police and fire funds. I wish there was also a legal responsibility similar to the IMRF. Think about this, Evanston is considering decreasing funding and we have a 54% unfunded liability. Cook County is “only” 43% unfunded and a report led by Commissioner Bridget Gainer states that on its current path, this pension plan will be bankrupt by 2038. IMRF is only 20% underfunded yet they’ll likely be raising funding requirements. How can Evanston which has a larger unfunded liability measured by %, even consider decreasing its funding? A report released in July 2012, by the American Academy of Actuaries states that “Pension plans should have a strategy in place to attain or maintain a funded status of 100% or greater over a reasonable period of time.” I don’t understand Evanston’s strategy. Decreasing funding will increase the unfunded liability and further jeopardize pensions for all current police and firemen and retirees.

    These pension bills don’t go away. The pension debt just grows because compounding never sleeps. Compounding works 24/7, and every day you try and ignore this issue, it gets worse.  When the 2008 Pension Committee published the report, unfunded pensions were $146mm. Today it’s almost $153mm, and likely will grow. And guess who will ultimately pay the bill? Your children and grandchildren. So instead of leaving them with some nickels and dimes in their piggybank, you’re going to leave them with a big I.O.U. Is that what you want to do for your children and grandchildren? Is that your legacy? Our country has given each generation a better opportunity, and I hope that you will continue this American tradition.

    In summary, both Police and Fire pension funds are poorly funded today with a 54% unfunded liability, demographics are a headwind as reflected by the growing pension payments projected over the next 30 years, recent accounting changes announced by GASB will further increase the unfunded liability, and future returns on assets will likely be lower than projected.

    Please make the right decision and fund the pension at last year’s level and make a commitment to pay down this onerous pension debt. Your children and grandchildren will thank you.

    I appreciate your time and attention. I am happy to take questions and if I don’t have the data, I’m more than happy to follow up with you, so that we have accurate and complete information.

  3. thank you James young

    Thanks for posting this.  It is really important.  I'm just one voter but I say pay the $14.9!  Worst case scenario is that we are less behind in our payments (the hole gets shallower!).  Worst case if we pay less is that the hole gets deeper.  Seems pretty simple, actually.  (not to demean all the hard work by saying it is simple — this math surely eludes me.  But the idea that we don't have to fix this is just shockingly weird and irresponsible).

  4. Do not wait for a crisis-fund the pensions now

    Read today's front page article in the NY Times about the Chicago Teachers Pension situation.

    http://www.nytimes.com/2012/09/20/business/teachers-pension-a-big-issue-for-chicago.html?ref=todayspaper&_r=0

    They have a crisis, they're paying out more in pension benefits than cash they're generating. This means they will go BANKRUPT if they continue on their current path.

    Evanston's Police and Fire Pension Funds are not in the same situation, yet. But as i stated in my comments, "we're on thin ice."

    – Police and Fire Funds are poorly funded, demographics are working against the fund and pension payments are projected to grow over the next 30 years, accounting rules recently passed will increase our "pension debt", and future returns on assets will likely be lower than expected.

    Since we are only about 46% funded combined assets for both Police and Fire Funds are $127.3mm as of the latest report. If we generate a 7% return on the $127.3mm, that means we made $8.9mm.

    However, in 2013 payments for Police and Fire benefits are estimated at $16.8mm. So we're short by $7.9mm (our investments earned $8.9mm and subtract payments of $16.8mm) Where do we get the $7.9mm? We use money contributed by active policemen and firemen along with the contributions paid by the city (taxpayers) to make up for this shortfall. (see page 6 of Police Pension Fund report which is page 153 of 684 in September 10th packet referenced below)

    Here's the catch, the contributions from current police and firemen and taxpayers are SUPPOSED to be invested and saved for FUTURE benefits. This is bad pension management. The only good news for Evanston is that we're not in a negative cash flow situation. But what happens if our future returns are lower than 7%(highly likely), what happens if more police and firemen retire earlier than expected (possible), what happens if more disabilities occur?

    Our current poorly funded pensions need EVERYTHING to go right – we don't have much of a cushion.

    Look at Cook County's situation – their pension fund is 57% funded and a recent report shows that this pension fund will by bankrupt by 2038.

    http://www.openpensions.org/wp-content/uploads/Gainer-Truth-In-Numbers.pdf

    Taxpayers need to understand this situation today and our political leaders need to take action today.

    While some of the Alderman commented that it will be a challenge to find another $700,000 in this year's budget, my question is if they think that's a challenge, where will they find $1,000,000+ in future years' budgets?

    The prudent decision is to pay more today.

    I recognize that pension issues are like talking about water mains, sewer systems, and roads, it's not exciting, but it's necessary. And when it breaks, there's a major problem, a crisis.

    Please do not wait for a crisis.

    For more information, go to the City of Evanston's website, and open the "Packet" for 9/10/12 meeting. Pension information starts on page 141 and goes to 222.

    http://www.cityofevanston.org/government/agendas-minutes/agendas-minutes—city-council/index.php

     

     

     

     

     

     

    1. Pensions may not be the only crisis the city is facing

      Jim you are correct in your analysis, but the catch is the city is facing similar problems with its capital debt, there in trouble. The city  is not fixing the water lines and where near fast enough, there are miles of 80-100 year old lines waiting to break just like on Central Street.  As I have pointed the city's practice is to take 3 million out of the water fund to keep the city operation going.

      Last year taxes went up 8%, adding $700,000 while only a 1,5% being added to the property has to be factored into the entire tax increase the city wants for this year. The question is last year"s tax increase was 8%, if we are zero and only accounted for the $700,000 thats a 9.5% increase over two years, how many tax payers have seen their income improve this much? As we both discuss at council, real income for over 80% of the population has not grown and dropped to 1995 levels with the lowest income group suffering the worst.

      Some one connected with the pension funds told me a public official here told him, they would just declare bankruptcy, he told them the  funds would take city assets such as the water operation, ofcourse I wonder why anyone would want to take over 100 year old water pipes?

      Ofcourse as one council member pointed out we have given far more away this year, to private individuals for economic development such as the famous Wine and Cheese Bar, it all about priorities and we all know the Council's prioirties are not in the right place.  Any council member who wants more taxes needs to be ask what will the cut next year?

      By the way when they discussed economic development some council members stated they did not want to stop the practice of giving free money to people for their business schemes.I call it political patronage..A real discussion is need here not about pensions but the out of control fiscal mismanage of the Mayor and the council,

    2. Why pay more into a pension system that is unsustainable?

      I agree, James Young, that if you have a big debt you should work to pay it down as fast as you can as long as you prevent it from getting bigger.

      Therein lies the problem.

      Illinois’ pension system is hopelessly insolvent with about $60 billion of assets and $200 billion in “legacy” liabilities. Just ask Northwestern University pension expert Professor Joshua Rauh of Northwestern who estimates that by 2018, all pension assets will have been liquidated. 

      Don't forget that politicians like Democrats Daniel Biss and Robyn Gabel seem to support a movement to shift teacher pension obligations from the state down to the local school districts. If that happens, Evanston taxpayers will be hit with even higher taxes (good thing voters didn't approve that $28 million new Fifth Ward School that Gabel, Evanston aldermen and D65 board members Jerome Summers and Katie Bailey all publicly supported).

      Aldermen can raise taxes again and ask taxpayers to foot more money to pay down the pension debt but the problem is the pension debt is growing exponentially. The pension system is unsustainable and always was. It's like trying to pay down a huge credit card debt but the interest rate keeps getting larger so as you pay more and more to try and lower the debt it still grows.

      I think the City Council should again invite Northwestern Professor Joshua Rauh to provide the Council with his opinion. Rauh has testified before Congress and is an expert on public union pensions. Rauh had told the Council that he thinks Evanston's pension obligations is going to sink the city no matter what aldermen do.

      Based on what I read, I think the pension mess will come to a head and drastic measures will be taken such as a bankruptcy (states and cities can declare bankruptcy according to some leading law firms and legislators on the matter). Don't forget Illinois is also facing a major Medicaid/Medicare crisis. The state can't even pay its bills now.

      I don't see why taxpayers should pay more taxes and get less services to pay down the pension debt when we still have spiking and double dipping going on in an unsustainable pension system, sinking straight into insolvency.

      1. Professor Rauh isn’t saying much we don’t already know

        AL –  The Mayor brought Professor Rauh to the council to tell us, what everyone should know, change the assumptions and the contributions go up. You don't need to be a PH.D to get that, even the Mayor who is a college drop out should be able to figure this out.

        I assume 7% return or I assume a 3% return, makes a large difference on what I put in.  But the truth of the matter is the city for years ( including most of the government units underfunded the pensions even with the 7% )

        We all know here in Evanston what City Council did with our money, they gave it away to friends, consultants and pet projects. Staff wasted it on mistakes. Many other things are underfunded here.  I know you were not a the budget meeting on Wednesday night since only four citizens showed up, but they did make an interesting statement all there other debt, is a big problem that they now have to raise more taxes for to cover. Ofcourse as they gave money away this year, the council and mayor did not think about that.

        Ofcourse, when you have public officials like the Mayor who claim it will cost the taxpayers zero dollars to open up a clinic in the basement of the civic center, you know how out of touch with reality are elected officials are.

  5. Employee pension contributions not what stated—‘Pick-ups’

    What is not to be missed in the NYT article is that the actual contribution teachers make is not the 9% they are suppose to but 2%..  The schools have had to make up the other 7%—a 'pick-up.'  So when it is claimed that the pension fund is not fully funded and the CPS is blamed, it is really another special deal [though the article says 'pick-ups' are wide spread], realize where the real problem comes from.  The 'pick-ups' were agreed to with the understanding that pay would then be limited–something that seems to have been ignored.

    How many other city [Evanston?], county and state penion funds have been given these deals where the employees don't 'really' pay their share ?

    http://www.nytimes.com/2012/09/20/business/teachers-pension-a-big-issue-for-chicago.html?pagewanted=2&nl=todaysheadlines&moc.semityn.www&emc=edit_th_20120920

    1. U can thank Mayor Daley

      It's my understanding that after Mayor Daley got control of CPS, he negotiated to limit salary increases for teachers by having the City of Chicago "pay" 7% out of the 9% of the employee contribution, with teachers paying 2%.

      But as teacher salaries have increased, they still pay 2%.

      What did Mayor Daley do, or not do? He didn't fund the 7% that he said the City of Chicago would pay on behalf of the teachers into their pension fund.

      There are many inconsistencies and potential abuses which need to be addressed to create sustainable and fair public pension funds.

      And look at what Mayor Daley did for HIMSELF – he boosted his personal pension and now receives nearly $184,000 per year, $50,000 more than justified, AND he saved himself $400,000 in contributions.

      http://www.chicagobusiness.com/article/20120502/NEWS02/120509952/daley-maneuvered-to-expand-pension-report

      That's leadership 🙁

       

       

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