Evanston will have to increase its property tax levy nearly 10 percent next year to start fixing a shortfall in police and fire pension funding, unless it makes other budget cuts.

That was the sobering news city consultants presented at a special City Council meeting Wednesday.

The city’s new actuarial consultants, Gabriel Roeder Smith & Company, said that based on their new analysis of the funding problem, the city has an unfunded pension liability of $140 million, up from an estimated $100 million just a few months ago.

The consultants say the new figures better represent actual and expected returns on pension investments, the increasing life expectancy of retirees and various other demographic and accounting changes.

Under state regulations the city is required to have its pension obligations fully funded within 26 years. Funding levels now are about 41 percent for the fire department and 44 percent for the police department.

Moody’s Investors Service reports Illinois communities with AAA credit ratings like Evanston’s average a 76 percent funding level.

Just to match the actuarially required contribution would require an immediate funding increase of $3.3 million — nearly 10 percent of the city’s $35.5 million current property tax levy.

The required additional contribution would then increase annually at more than twice the rate of inflation for the next quarter century.

By the end of the period the additional pension payment would be over $20 million a year.

But City Manager Julia Carroll says credit rating agencies are likely to be skeptical about the city’s ability to handle those increasing payments, so that plan, she says, would likely lead to a reduction in the city’s credit rating, which in turn would increase costs for all future city borrowing.

The city could decide to make even larger pension payments in the next few years to avoid the credit rating downgrade, but that would put even more pressure on property taxes and the rest of the city’s budget.

So the city’s staff and its consulting firm Scott Balice Strategies are investigating the possiblity of issuing pension obligation bonds.

They believe they can borrow the money now and lock in lower costs than what would be required if the city makes cash contributions to the pension funds each year.

Depending on the size of the bond program, it might slice $12 million to $18 million from the overall payments required.

But Ms. Carroll said there are risks to the bonding approach and she wants to do further research before making a formal recommendation to the council.

The aldermen agreed that she should continue investigating the pension bond option.

Mayor Lorraine Morton said, “I’m not looking to raise any taxes, and I don’t think the aldermen are either. The public is going to say find another way.”

Alderman Cheryl Wollin, 1st Ward, said, “I don’t see how we can do it without raising taxes.”

Alderman Steve Bernstein, 4th Ward, said, “We’re talking about things here that are not discretionary. We have to fund this pension. If we don’t want to raise taxes, then we have to cut somewhere else.”
 

Bill Smith is the editor and publisher of Evanston Now.

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8 Comments

  1. Pension debacle
    Bill,

    Excellent summary of last night’s wake-up call, thanks.

    What is happening here is why companies are moving to defined contribution plans rather than defined benefit plans. They are just not sustainable.

    It was interesting that they did not want to dwell on how Evanston got to this sorry state. This did not happen overnight, this was 10 to 15 years in the making. There are rumors that the actuary we used was not certified!

    Another interesting aspect is that the percentage pension contribution by the City was some 60% of the salary — and that does not include health and other benefits. That means the employee overhead is at least 100%, compared to 35% or so, in private industry.

    Is this true for other city employees, aside from police and fire? If so, then one can see why some functions are being outsourced.

    Is that your wallet twitching?

  2. Evanston Assets to be considered.
    Evanston Council needs to be accountable. They need to consider closing this gap created by ignoring the issues for a long period of time.

    Evanston has property assets that can be be liquidated. Consider paycut for executives (city council) as any other corporation does. They needs to be accountable on their performance.

    They need to seek for ways to cut cost or raise funds just like when corporation has finace issyes. Do not beg for help from tax property payer. Does Corporation ask for donation from share holder in case of finace issue?

    I do not see any effort from city council trying to figure out the way to raise funds except to make proposal to beg $ from citizen.

    If Tax will be used for a benefit of citizen, I have no issues with increase of tax in general. But not to cover the mis-management of City council. Where is accountability?

  3. Aha! Bike auction & pension connection now makes sense …
    Now I understand why the Evanston police put the money raised from their bike auctions into their pension fund!

    “Proceeds from the bike auction will support the police pension fund.” See “KEEP ON BIKING, Evanston!” on page 11 of the City’s Fall 2007 Highlights Newsletter:
    http://www.cityofevanston.org/global/pdf/fall2007.pdf

    I’d rather see the money used to promote biking in Evanston.

  4. What happened?
    I am in agreement with the previous post regarding accountability. On February 28 (only about 6 months ago!) we were informed that we had a balanced City budget. Now, a liability of somewhere between $100 million and $140 million is quite suddenly looming. It is obvious that this debt must have been known for some time. Does anyone know how long this had been known, and how it got ignored? The Evanston Review and/or The RoundTable should provide some investigative reporting; not just the facts.

    Why didn’t the City Manager identify and report this situation sooner? Apparently this is getting the same attention as the maintenance of the Civic Center building!

  5. Pensions and other funding
    With all the condos, and projected towers, soaring in downtown evidence, certain demographic trends are happening. During one of the Civic Center debates concerning the absence of that TIF money for schools, it was stated by one of the pro advocates that only 11 children had been added from all the condos going up downtown. The implication being that new condos, especially downtown, are not going to impact school attendance.

    The law of unintended consequences rears its head again. If we add people downtown without any school requirements, be it condos or towers, they will not view any school tax revenue referendum kindly, since there is nothing in it for them. The projected increase in property taxes for the “suddenly” (decades) discovered pension underfunding will also negatively impact any referendum to increase taxes, pension, school or otherwise. I would venture that future funding increases from referenda to be generated from Evanston property taxes are going to be hard to come by.

  6. Pension constraints
    Given the pension problem that, as one alderperson told me “has to be solved”, I find it irresponsible for the city council to be spending $150,000 on an architectural study of Civic Center options – none of which can be implemented without substantial city contributions. The idea of getting a new city hall for nothing is ridiculous.

    The best, most fiscally responsible decision would be to scrap together a few million dollars, fix the things that are broken, and get along year by year. ‘Nice to have’ items a new city council chamber, have to wait in line behind other priorities.

    1. Is everyone ready for a 10% city of Evanston tax increase?
      The council has know about this problem for years. Given the city increases taxes typical 4 to 6 percent adding in the police and fire increase it is easy to see the increase well over 10% – they will lighten the blow by telling you it is not that high since they will average it with the other taxing organizations.
      In order to keep this under control the city would have to cut my of the pet programs of council members and others. I have long been of the impression there is about 5% fat in the budget that could be cut with little effect on anything.

    2. We’re being shnookered!
      I agree with this and the earlier comment that we have assets to sell. I am angry that the elected officials and the City Manager have ignored both of these critical issues which are their among their primary responsibilities (being fiscally responsible by paying their obligations and maintaining City owned properties). They need to get a grasp on reality. Apparently by reading this blog, it is obvious that they are more concerned with how late a pizza can be delivered in Evanston than these issues. Their appearent mode is to stick their collective heads in the sand (i.e. there are barricades around the City Hall for how many years now?)and hope that these problems go away. Ignoring the pension problem is just plain irresponsible.

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