City officials say Evanston could save $20 million as it pays off its police-fire pension debt by financing most of the debt with pension obligation bonds.

The city’s latest actuarial estimates show that over the past couple of decades it has built up a $140 million unfunded liability for the public safety pension programs.

With interest, the cost of paying off that debt by the state-mandated deadline in 2033 is expected to total roughly $250 million.

At a special City Council meeting Monday city consultants outlined options for the pension obligation bond plan, but acknowledged that much more work needs to be done before the council can make an informed decision about whether to use that approach.

The anticipated savings from the bond approach is based on an assumption that the city can earn a higher return on the pension obligation bonds — perhaps 7.25 to 7.5 percent — than the roughly 6 percent return that funds invested directly in the pension funds are expected to achieve.

Tim Schoolmaster, head of the police pension fund board, told aldermen “You’ve inherited some problems from previous city governments. You’ve been painted into a corner. But it’s a corner you can get out of, although you must make some hard choices to do it.”

Schoolmaster said there are a variety of questions about details of the pension obligation bond plan, but indicated that the pension board generally supports the approach.

By state law the police and fire pension boards are required to limit their equity investments to no more than 45 percent of the total fund, which tends to reduce the level of return they can achieve

City Manager Julia Carroll said she hopes to have a final recommendation from city staff available next month with a vote by the City Council on the program scheduled for January.

“It’s a very complex matter,” Carroll said, “and we will have taken more than six months to study it.”

At the moment she is recommending funding 90 percent of the debt through bonds, the highest level of three scenarios explored by the consultants.

Kevin Hoecker of city consultant Scott Balice Strategies described several investment products offered by different major banks that could meet the city’s needs for the pension bonds.

They offer various combinations of protection for the city’s principal investment and some could be structured to provide a fixed rate of return for at least a portion of the life of the bonds.

City officials have concluded, based on talks with rating agencies, that if the city uses a pay-as-you-go approach to funding the pension debt, rather than issuing bonds, that it is likely to see its overall debt rating reduced from AAA to AA, which they anticipate would add $6.1 million in debt service costs for the city over the next 26 years.

While funding the pension debt is expected to create pressure to raise real estate taxes, the city’s existing general obligation debt payents, also funded through the property tax, are scheduled to decline dramatically over the next several years.

City officials presented a chart Monday that suggested that city could take on the pension obligation bonds and a modest amount of additional capital spending without dramatically increasing its overall debt service obligations

Bill Smith is the editor and publisher of Evanston Now.

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19 Comments

  1. The pension fund fiasco: things unsaid
    Bill,

    Some things that need more discussion.

    First of all, the incremental impact on property taxes was not discussed at all. What was discussed was the possible incremental savings on payment of the unfunded liability. That “saving” is the differential between the cost of retiring the bonds vs. what the pension fund could earn.

    That is frankly peanuts compared to what we will have to pay in future taxes.

    There were several investment vehicles described, but there was a basic problem — under Illinois law, none of these could be held by the pension fund. At best, they could be held in trust by the City and the earnings transferred to the union pension funds. We should give this pause because it is the City and previous Councils that got us into this mess — can we trust them again?

    There also seemed to be a large difference in fees paid by the firefighters and the police pension funds. The police seemed to be doing quite well and at a lower management cost. They should talk to one another.

    Lastly, unsaid was the prospect of the City funding a new Civic center, some $30 to $50 million with rehab of the present building (in its state of disrepair because of the City’s Deferred Maintenance Syndrome) when it could be rehabbed in stages at much less cost.

    1. Tax hike for pensions
      Hi Vito,
      Back in September in an earlier presentation to council, city staffers said the first-year pension funding increase would need to be $3.3 million if they don’t do the pension obligation bond approach.

      This year the total city property tax levy is $35.5 million. So, we’re looking at roughly a 10 percent increase in the city’s property tax levy.

      Since the city share of the total property tax bill is about 20 percent, a person with a total property tax bill of $10,000 would see an increase of roughly $200.

      The real kicker is that the annual pension cost increase is scheduled to rise from $3.3M the first year to $20.5M in 2033 when the city supposedly will finally erase the last of the pension underfunding.

      For that final year the pension tab would add over $1,200 to that $10,000 tax bill.

      So, that’s why a scheme to knock $20M off the overall obligation through pension obligation bonds looks appealing –though it will by no means totally eliminate the pain. And it obviously contains risks that need to be carefully evaluated.

      — Bill

  2. Bill – we need to see all the numbers!
    Bill – you must remember they city is only talking pension now – typically they rasie taxes 4-6% that is the total budget each year – how they get there is through a large number of adjustments and taking revenue from multiple sources – what I think you may not realize is they are running out of sources. The use of the tranfer tax is interesting – since less than two years ago they try to use this to funded affordable housing.

    What we are really talking about is 16 to 20% tax increase – each year for years to come which is not realistic. I think we know what is about to happen the city must finally cut back – that is down size. I do not like what we have done here for years we play the 3% game that is each department must cut 3% -rather than the council make a decison to cut out any thing – last year was the first time they cut a program the health department – it is very clear to me there is alot more non-basic services to cut here. This approach of small cuts each year is bad – it is very bad for employees – what must happen is one major cut and no more for five years or longer. Thus stop making employees feel their jobs are on the line each year.

    The pension crisis is the tip of the iceberg so to speak – it is a example of very poor leadership – what the city did for years was under pay the pensions – so they had money for their pet projects – a “legal ponzi scheme” so to speak. Now the end has come and the cards are falling – this will not be the last item –

    1. Pensions
      I keep seeing statements such as: “what the city did for years was under pay the pensions – so they had money for their pet projects – a “legal ponzi scheme” so to speak.” This is just flat-out incorrect.

      There are three major components to pension funding: (i) city contributions, (ii) investment performance, and (iii) changes/increases in benefit levels or attainability.

      Crack open the city’s latest annual financial report and turn to the statistical pages: you’ll see that the city has made the actuarilly-determined pension contribution in each year for at least the last 10 years. So, the idea that the city is or has somehow “underfunded” pensions is, on its face, wrong.

      The questions is why, despite the city making the full contributions, are the funded levels dropping. That has more to do with investment performance and benfit changes – and neither are in the control of the city. The plans are managed by the police and fire pension boards, and in most years they simply haven’t seen the types of returns needed. This is, in part, due to conservative allocations of the assets (more conservative than state law allows and more conservative than similarly sized plans). Its also due to the State Legislature modifiying retirement rules: allowing people to retire earlier and earlier, enriching benefits, counting military service, etc, etc, etc. These are the aspects of the pension funding situation that are really driving the increases in the unfunded liabilities, and they are not something the city has direct control over.

      It’s depressing to see people continue to claim that this problem is due solely to some inaction by the city itself.

      1. Pension fiasco (cont.)
        Anonymous,

        The city’s problems stem from the actuarial assumptions made by their actuary, no longer with us. I hear that he made assumptions that they would retire in their 60’s and would not live as long as actuarial tables now state. One must realize that most fire and police start in their mid-20’s and would retire in their mid to late 50’s and people live longer. That makes a tremendous difference in what contributions should be.

        To me it is part of the DMS — deferred maintenance syndrome — that plagues the city. I think the prior administrations did not want the tax increases required and put it off. That makes them devious. The other alternative is incompetence.

        1. Re: Pension fiasco (cont)
          Yes, that is true – they’ve switched to an actuary with more conservative assumptions, but that doesn’t mean the city has “underfunded” the pensions in the traditional sense, nor does it mean that state changes to benefit levels and investment performance is blameless.

          The assumptions which calculated the required contributions also generated the unfunded liabilities. If investment returns meet assumed levels and pension attainability doesn’t change, then making the required contributions should reduce the unfunded liabilities, not increase them. The fact that the full contributions were made, but the unfunded liabilities increased, means that there is (and was) some problem with investment returns and benefit attainability.

          1. Anonymous – should a criminal investigation occur?
            Anonymous – you have some knowledge of the situation – are you a city employee?

            Do you feel anyone involved committed a crimianal act? The taxpayers here are left holding the bag for this mess. Beyond any criminal issue – is there a civil suit here?
            As a taxpayer there appears to be blame for this mess – I am not a lawyer but before this ends – it is likely someone may ask the state to look into this?

            Anonymous you make one very interesting mistake in your thinking that is Evanston has one of the lowest funding levels – other communities have done alot better -so clearly there is blame – screw up, mismanagement, criminal or civil – I do not know and yes there may be plenty of people involved to blame!

            I think those involved with this would like to not dig to deeply into the past since it might turn up some interesting items.

            I think the city alone may not be completely to blame, but given the city is responsible for our money (taxes) the inaction to correct the problem for years – has left us with a mess. I found it interesting a one of the meetings the Mayor could not even think who she appointed to the boards – I appears to me for a very long time the city took very little interest in monitoring the pensions, the only reason now they are taking an interest is we are about to be down rated by the bond companies and it appears we will have a huge problem.

          2. “Anonymous – you have some
            “Anonymous – you have some knowledge of the situation – are you a city employee?”

            No.

            “Do you feel anyone involved committed a crimianal act?”

            No.

            “The taxpayers here are left holding the bag for this mess. Beyond any criminal issue – is there a civil suit here?”

            Anyone can file a suit, but I don’t see how it would be successful.

            “As a taxpayer there appears to be blame for this mess – I am not a lawyer but before this ends – it is likely someone may ask the state to look into this?”

            Not really. Evanston has pension problems, but its nowhere near the most troubled in the state – and to my knowledge the state isn’t investigating those villages and cities.

          3. Pensions (continuing)
            Dear A.

            “More conservative assumptions” is an understatement. If what I hear is correct, there were assumptions that retirement would be in the 60’s rather than the mid 50’s and that lifespans were shorter. In addition earnings estimates were higher than actual — all of this caused the underfunding. How can one say, over a decade or more, when earnings did not meet predictions, that they were meeting required contributions? After a year or two, when earnings were not meeting predicted values, a red flag should have been raised. Was it? It took Moody with a veritable 2×4 to the head to alert them.

            You are being overly charitable. If this were the sole example of fiscal immaturity, then what about all the deferred maintenance, the insane drive for a new Civic Center, all the “feel-good” programs, when the budget was leaking like a sieve.

          4. “How can one say, over a
            “How can one say, over a decade or more, when earnings did not meet predictions, that they were meeting required contributions?”

            Because, if in Year A earnings fall short of the assumption, that increases the unfunded liability and therefore the required contribution calculated for the next year (Year B). The city has always (at least for the last 10 years+) made the required contribution.

            Part of the confusion here is that you are probably confusing a technical term (required contribution) with a more subjective sense of the term (as in, what is the best, or appropriate, contribution regardless of actuarial assumptions). Go to the city’s latest CAFR.

            Turn to page 119 of your Adobe viewer (page 87 of the CAFR itself). You’ll see that the city has for last few years funded the full contribution as determined by the actuarial assumptions. The unfunded liabilities over that time period (generated by the same assumptions) increased, which means it is not the city’s cash contributions which are the problem, but rather investment returns and state changes to benefit attainability.

          5. Duhhh?
            “The unfunded liabilities over that time period (generated by the same assumptions) increased, which means it is not the city’s cash contributions which are the problem, but rather investment returns and state changes to benefit attainability.”

            That is the past exonerative.

            If one sees that the unfunded liabilities are increasing, investment returns are not reaching goals and the state has made changes — are these not warning signs? If one assumes that these signs were evident (a big assumption considering past and present performance) would not the prudent approach be to evaluate what one was doing, rather than trod along merrily? Should not the actuarial assumptions have been challenged.

            Duh?

            As I said before deviousness or incompetence — your choice.

        2. Retirement age
          Maybe the answer is that fire and policemen will have to retire later in life. Also, if state law says that the pension liability has to be funded, then I guess we will have to change the state law.

          I’m 30 years old. Because I work in the real world, I don’t have a defined benefit pension. I have to provide for my own retirement. I certainly am not going to put up with tax increases for the rest of my life so that other people are afforded that luxury! Private sector employees no longer see defined benefit pensions in this day and age. Why should public sector employees receive superior benefits than those in the private sector? Things need to change!!!

          1. Retirement age
            I see your point. Your “real world” job sounds pretty dangerous! What is the death rate in your job? Does your family kiss you goodbye when you leave for work with the thought that the next time they see you that they may be having to identify your body? How many of your co-workers have been injured at work to the point they are unable to work anymore? How many people in your profession have lost their lives doing their job? Are you aware the average life expectancy for a police officer or fireman is 57? If a cop or firefighter dies while saving you, are you going to pay their mortgage or fund their kids education?
            How was your Christmas? Did you have to work an eight hour shift? Did your family have to plan their celebration around your work schedule? Were you unable to have a Christmas drink because you had to be at work at 11pm?
            It’s real easy to cry that you don’t get a pension in your “real world” job, but I bet you would be the first one to call 911 when you need the services of the police or fire department.
            The police and fire departments are always hiring, feel free to apply and you too can be rewarded with a pension for risking your life every day!

          2. Missing the point
            We are always indebted to police and firefighters (and their families) for their service. That goes without question.

            The real point is – “insert your favorite program/policy/pension/charity here” can not be funded in the long term by raising taxes year after year. There must be other ways explored, even if that means cuts in service elsewhere in the budget. Wages in the “real world” are not keeping pace with continuously rising state/local taxes and increases to cost of living.

            It’s about priorities: where those priorities lie and who makes them. If we have a drastic pension crisis, then this calls for drastic cuts to non-essential areas of the budget to bring our finances back in line.

            But that’s the responsible way to do things. This is local politics. Far easier to tax your way out of any given budget problem and avoid any real change or long-term solution. None of these people look past their own career or the next election.

            The bitterness stated by the original poster is valid, and it is felt by many people. 30-somethings today have very dismal prospects of retirement, and hearing about the pensions of elected officials or town/city/state employees is like rubbing salt in a wound. It has nothing to do with respecting the work of fire-fighters, teachers or police officers.

            Who else gets a pension? Garbage collectors? Public Works? Community Development? Bill – if you can answer which departments are entitled to pensions and what the cost percentage breakdown is, now there is some interesting information. Just whose pension are we having a crisis over?

          3. Who gets a pension
            All full-time city employees have a defined-benefit pension program. But except for the public safety employees they are part of the Illinois Municipal Retirement Fund, a state-wide program that, amazingly enough, is reportedly fully funded at current city and employee contribution rates to the actuarial level required to meet its payment obligations.
            Under state law the fire and police pension programs are separately operated in each community and have a restrictive set of investment limitations. That plus what are now considered overly-optimistic investment return and overly-pessimistic life expectancy assumptions by the city’s former actuary, unfunded benefit increases ordered by the legislature, poor actual investment performance and a blind eye turned to the problem by local officials for a couple decades or more are among the factors that have combined to put the city’s public safety pension programs in dire straits.

          4. Police and fire fighters pay
            You need to explain the fact that police and fire fighters pay into the pensions plans – usually in private industry years ago employees did not pay into the plans – it is my understanding police and fire fighters are paying in about 10%?

            Thus we are not comparing a private companies old time pension plan to a public employees.

            A 10% paid of a salary over 30 years if properly invested should have some return. At the same time private employers match into 401K – thus let say the city should give 5% – thus 15% pay in over 30 years – It would appear to me this should give a police officer or a firefighter about 1 million dollars.if not more. Thus taking 4% out after retirement per year if it was a 401K – – it is my understanding an average police officer at the end makes about $70,000 – the city gives $56,000 in pension 80% – for 30 years of service versus $40,000 (4% of the 401K) – I do not see this is any great rip of to the taxpayers. Since the numbers could be much closer if you assume better returns on the investments.

            The bottom line the council members under funded this for years and used the money for their patronage programs in the end we will all suffer – including the police officers and fire fighters since they will adventually have to lay alot of people off or raise the taxes through the roof.

            Lets not kid anyone the council members are who is to blame!

          5. retirement age/pension crisis
            I’m a little late to this conversation, but having read some of the comments posted here, I felt I should add some thoughts. First, to Mr. Witt. I have been a fire captain/paramedic in Evanston for the past 23 years. I am 47 years old. I live in a “real world” in which I kiss my family good by every third day for 24 hour shifts. I have missed countless number of family functions, holidays (I was on duty AGAIN this Christmas) and my many of my kids performances. I knew this was going to be the case when I signed the dotted line. So I don’t expect your sympathy. Do you really want older firefighters and police officers? You have no clue the toll that this lifestyle takes on a body and mind over a 25-30 year career. This is a young persons job. Believe me.

            A major part of this crisis is due to the fact that the city utilized the services of an incompetent actuarial firm who fed the city with assumptions that stated 50% of cops and firefighters would retire between the ages of 65-70. Let that sink in for a moment. When was the last time you saw a 68 year old firefighter? How about never. I don’t think you would want some one in his mid 60s coming to rescue you and yours in the middle of the night. So for a decade or more the city “technically” met it’s actuarial required contributions, but the numbers provided to the city by it’s actuaries were bogus. The city operated under the assumption that half of us would retire when we reach our mid 60s, when in actuality, most of us retire in our mid 50s. Thus, the city assumed that they’d be getting 10 more years of contributions from firefighters and cops. Additionally, the city assumed the benefit paid by the city to retirees would be for significantly fewer years, as we’re all closer to the average life span at 65 vs 55.

            Two other aspects are part of the problem. Fund performance and changes in benefits. I am not on the pension board, but my understanding is, that by state law they can only invest 45% of their portfolio in equities. The rest has to be low risk , low yield investments. If you assume a rate of return of 7.5% and only get 6%, you’ll have problems.
            About 5 years ago, a state law was passed that provided a 100% widow’s benefit. Meaning when a retiree dies, the widow receives 100% of his/her pension. It was 45% prior to this. Widow benefits for police has always been 100%. But we also had an increase in our contributions of 1% as a result. We now pay nearly 10% of each check to our pension.
            I am sorry that it has come to this. It is not the fault of those of us who serve and protect our community. But we warned the city many times over the last 20 years that this day was coming. It has now arrived.

          6. Greg – a few points
            Interestly enough if you look at 401Ks in the private sector it appears less than 20% of employees in those programs are putting in 10% or more of their salaries. The average appears to be about 6%. Thus the police and fighter fires here are actually being ask to contribute a larger percent of their current pay than the average Evanston taxpayer might put into his or her 401K – ( I who guess there are a large group of taxpayers here who only have social security maybe 20% or more of the population )

            Our council members are trying to pass the blame of this mess on anyone but themselves – given many of the firefighters here are involved with the alderperson reelections I think you and the others here do not want to assign any of the blame to your friends on the council. In my own professional experience when I hire a consultant I know actually what they should be doing. the council members – stating the consultant gave them bad information because of poor assumptions is a excuse for their own lack of intelligent and nothing more!

            By the way they are screwing up plenty of other things here – I have along list – this is the first major one that is causing a huge program – there are plenty of others which have cost us millions of dollars that have been covered up by city staff.

  3. Police Pension
    I have read, with interest, your posts regarding the pension crisis. This is nothing new, nor is it a problem that has arisen in the past few years. Some time back, 15 years or so, the pension board sued the city based on their non-funding of the pension. I attempted a Google search for this but could find nothing. But I can say, with absolute certainty that this problem has been around for a long time. It is now just catching up with them and now they are scrambling to fix the problem. It is correct that the city has been left holding the bag from past administrations that borrowed from Peter to pay Paul. Well, it’s time to catch up and now it’s a crisis …..

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