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