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City faces budget-busting pension debt

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."
 

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