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Moody’s Investor Services, Inc.Thursday downgrated the City of Evanston’s general obligation debt rating from Aaa, the highest rating possible, to the next highest level, Aa1.

Moody’s currently has 17 Aaa rated and 22 Aa1 communities in Illinois, with the remaining communities being rated at Aa2 or lower.

Based on calculations by the city’s actuaries, Evanston has $170.6 million in unfunded pension liabilities, But a new, more conservative calulation by Moody’s pegs them at $259.9 million.

That’s 2.65 times the city’s annualized 2011 fiscal year operating revenue, compared to what Moody’s says is an average of 1.0 for all local governments.

City officials have met with Moody’s ratings analysts and discussed this ratings change, which is almost solely due to the city’s outstanding pension liabilities. These pension liabilities are now being evaluated in a new framework that is more conservatively calculated.

Evanston’s chief financial officer, Marty Lyons, says the evaluation change reduces projected revenue from the city’s current assets in trust, thereby increasing the unfunded liability of the police and firefighter pension funds.

Prior to the changes in Moody’s evaluation framework, the city had already taken steps to improve the true funding position of the police and firefighter pension funds by lowering future year investment earnings assumptions, using a more conservative actuarial calculation method than that required by the state and updating mortality and other tables to more accurately reflect the future assets and liabilities of each fund.

Lyons says the city, working with both pension boards, will continue to modify these key assumptions to improve the long-term funding of police and firefighter pensions.

Moody’s reaffirmed their opinion of Evanston as a strong community due to strong property values, higher than average per-capita income, stable city operating revenues, reduced operating expenses and manageable non-pension related debt.

Moody’s also issued a report Thursday saying the nation’s states are under-estimating their pension obligations.

Related document

Moody’s Evanston rating downgrade announcement

Bill Smith is the editor and publisher of Evanston Now.

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16 Comments

  1. What will Council response be?

    Probably, we need to hire more city workers so they can support the Pension funds [and of course draw from them] as well as have the city pay more.

    Open more wine bars; give money to business owner to 'spruce-up' their property [awnings, fences, etc.], buy them more land and parking lots, pay landowners obsene prices for their land; put up more music and dance studios; tax more [of course !]; fine businesses to raise revenue [great way to get them to move !].

    I.e. "We know we lose money on each of our policies but we make it up with volume."

  2. Wake up call to city council

    Key points in the Moody Report found in the link:

    Challenges (the city faces):
    Sizable pension contributions
    General fund reliance on sensitive sources of revenue (i.e. sales tax, gas tax, utility tax)
    Above average debt burden

    What could move the rating down:
    Increasing debt burden
    Declines in liquidity and/or fund balance levels 

         While many people have argued in favor of giving city-backed loans and/or grants to various private businesses (ward 8, Peckish One, Chicago Waffle House, Heartland Center,Trader Joe's, facade improvement, marketing $, etc. etc.  etc.), it appears that Moody’s  disagrees.   

      As Moody’s points out, Evanston still does have many strengths.  It’s time for city council to stop trying to play bank.

    1. Moody ratings mean higher cost to borrow money for city

      Whether they can go to hell or not is besides the point.  Lower ratings mean higher borrowing costs, which will most likely mean higher taxes for all residents. 

    2. Corruption, debt, whining

      Of course the ratings agencies are corrupt, but it's also true that the City has a lot of debt and it would be better if we had less. A smart, honest City Council would declare a policy of "no more TIFs" and "No more subsidies or loans to private organizations."  They would discover, after considerable whining, that actual entrepreneurs, even Trader Joe,  would find a way to provide needed services and products here.

       

      1. Who is whining about debt?

        "Of course the ratings agencies are corrupt, but it's also true that the City has a lot of debt and it would be better if we had less"

        Not necessarily.  The actual amount of the City's debt is not relevant.  What matters is how much the City owes compared to how much revenue it collects every year, its property tax base, and its population.

        "They would discover, after considerable whining, that actual entrepreneurs, even Trader Joe,  would find a way to provide needed services and products here."

        Maybe….or maybe Trader Joe's would just open up in Skokie or Wilmette.  A ban on TIFs would only work if every city agreed to do it.  Otherwise, it will be a race to the bottom as every city tries to benefit by attracting business from neighbors….and every state tries to attract businesses by offering tax breaks, subsidies, or looser regulations.

        1. Who is whining about debt?

          "Not necessarily.  The actual amount of the City's debt is not relevant.  What matters is how much the City owes compared to how much revenue it collects every year, its property tax base, and its population."

          So let's see, as long as we keep  raising revenue (taxes), we can increase debt with no consequences? Hmm, I wonder who this guy voted for? Sounds familiar.

          1. Who did I vote for?

            "So let's see, as long as we keep  raising revenue (taxes), we can increase debt with no consequences?"

            You really don't get basic economics.  Yes, if the economy is growing…the government's debt as a percent of GDP or as a percent of income can decrease,  even if the total number is getting larger.

            Do you realize that under President Obama, the debt  as a percentage of GDP has started to shrink…and without raising taxes?

          2. Wrong

            Obama and Democrats have raised taxes this year. Once Obamacare kicks in this year more taxes will be raised in the form of penalties for not having mandated government health insurance. The interest rate of college student loans just doubled because Democrats put that in a clause in a bill to reduce two years ago.

  3. Evanston debt rating

    Moody's reduced the debt rating from the TOP rating to the NEXT HIGHEST.  As Moody's and Marty Lyons have both indicated, the decline was due to Moody's having used an even more conservative actuarial assumption than the conservative assumptions already used by the city.  Evanston has been proactive in evaluating and dealing with pension issues, and deserves our respect and appreciation.  We are lucky to have our thoughtful and energetic City Council, and I am sure that they will continue to work towards an excellent financial position.

    The reduction in debt rating did NOT have anything to do with Evanston's policies of encouraging local new business development.  Probably because it is either irrelevant to the total picture or sponsoring new businesses is understood to be a really good thing.  

    1. Risks do not justify investments

      If Evanston continues lending out money to private business, and if the businesses go bankrupt, we are left with non-liquid assets and potentially more debt. According to Moody's, both of these factors could move us further down in ratings.   In the big picture, failure of a few businesses is probably irrelevant and lending out the money in the first place didn't downgrade us.

        The point being, we are on an incredibly risky path, and I do not think the rewards justify the risks. The MOody's report also indicates that relying on taxes such as sales tax is not a stable source of city income.  

    2. Risks do not justify investments

      If Evanston continues lending out money to private business, and if the businesses go bankrupt, we are left with non-liquid assets and potentially more debt. According to Moody's, both of these factors could move us further down in ratings.   In the big picture, failure of a few businesses is probably irrelevant and lending out the money in the first place didn't downgrade us.

        The point being, we are on an incredibly risky path, and I do not think the rewards justify the risks. The MOody's report also indicates that relying on taxes such as sales tax is not a stable source of city income.  

    3. Evanston Pension Assumptions are NOT conservative

      The recent ratings downgrade by Moody's sends a strong message that pension issues continue to be a major problem in Evanston. Even though the pension challenges are better understood at the local, county and state level, the magnitude continues to be underestimated and their implications underappreciated.

      For example, in March of 2008 the City of Evanston's Police and Fire Pension liability totaled $145.8 mm (page 11 of City of Evanston Pension Report dated October 24, 2008) Today the reported liability has increased to $148.5 mm and that's after the City of Evanston has contributed significantly more money into the pension funds. Moody's appropriately adds $21.1 mm of pension liability from the Illinois Municipal Retirement Fund for a reported total of $170.6 mm for Evanston. But the "real liability" cited by Moodys for Evanston is $259.9mm since Moody's uses a more conservative and appropriate discount rate.

      So for people who have followed the pension issues confronting Evanston over the last 5 years and thought that our liability was around $150mm, now wake up to find out that the liability is closer to $260mm. And that's before any "pension debt" Evanston citizens are responsible for at Cook County and the State of Illinois – the State figures will really make your head spin.

      Historically, the City of Evanston overestimated returns, underestimated wage growth assumptions, used outdated longevity tables and underfunded the pensions. The one current assumption which is still likely too high is the assumed rate of return of 7.0%. This is NOT a conservative assumption. The probability of reaching this annualized rate of return over the next 10+ years is very low in my opinion.

      As I stated before City Council on September 18, 2012, the 7.0% return assumption is too high.

      "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 (2012) 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 the 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." This year, the returns should be higher.

      "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 2.5%. 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." Year to date in 2013 most bond investors have LOST money. And current fixed income investors will continue to lose money as interest rates go higher.

      So what does this mean for Evanston residents. The "pension debt" you are responsible for is much higher than you expected. More of your tax dollars will go to funding this pension debt at the local, county and state level.

      Mostly likely taxes will go up and/or government services will go down.

      That's the reality.

  4. Small risk, high returns, justified

    When communities make investments that will generate increases in revenue streams, especially commercial r.e. tax streams, it is viewed as a positive with rating agencies.  The fact that the city has made such investments in the likes of trader joes, gordon foods, various TIFS, actually helps keep our rating higher because the rating agencies can see the future increases in those revenue streams.

    Communities that do not or can not show the ability to grow their tax base are viewed in a negative light.   

  5. Important pension meeting Sunday July 14th @ 3 pm

    Today @ 3 pm State Senator Daniel Biss is hosting a meeting to discuss the Pension situation in Illinois. The meeting is in Evanston at the Levy Senior Center at 300 Dodge Avenue. In Today's Chicago Tribune Mayor Rahm Emmanuel wrote a commentary highlighting the pension challenges in Chicago. Similar issues confront the City of Evanston, Cook County and the State of Illinois. This article, on Page 21, is titled, "The Longer We Wait for Pension Reform, the Higher Price We Will Pay." Everyone is invited to attend.

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