On June 27, Moody’s Investor Services, Inc. announced it was downgrading the City of Evanston’s general obligation debt rating from Aaa (the highest rating possible) to Aa1 (the second highest credit rating). The City said in a prepared statement that Moody’s currently has 17 Aaa rated communities and 22 Aa1 communities in Illinois, with the remaining communities being rated at Aa2 or lower.

Martin Lyons, the City’s chief financial officer, said that the downgrade is due almost entirely to the City’s unfunded pension liabilities. He said Moody’s is evaluating the unfunded pension liabilities using a new framework that uses more conservative assumptions, which have the effect of reducing the projected investment income on assets held in the pension funds and increasing the City’s unfunded liability to the pension funds.

As an example, Moody’s says the City assumes that it will earn an investment return of 7.0% on assets held in the police and firefighter pension funds. In July 2012, Moody’s said it would use a return of 5.5% to judge and compare the financial soundness of state and city pension funds.

The impact of using different assumptions is significant. Moody’s June 27, 2013 report says the City’s reported unfunded liabilities for the police and firefighters pensions and for its share of other municipal employees’ pensions is $170.6 million. Moody’s says the City’s unfunded liability, using Moody’s new methodology for calculating the unfunded liability, is $259.9 million.

The City has been attempting to improve its ability to meet its pension obligations in the future. In a prepared statement, the City said, “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.”

Mr. Lyons added that the City, working jointly with both pension boards, will continue to modify these key assumptions to improve the long-term funding of police and firefighter pensions.

Despite the downgrade, Moody’s June 27 report concluded “the City’s tax base remains well positioned for long-term stability” and “we expect Evanston’s financial position to remain satisfactory based on a history of implementing expenditure reductions to balance operations and the financial flexibility afforded by its home rule status.”