City finance officials say pension strategy needs more study

Even as the 2023 budget proposal is set to be voted on Dec. 12, the city’s top financial advisors are questioning whether it is in Evanston’s best financial interest to move ahead with aggressively funding police and fire pensions using the city’s excess reserves.

Both the chair of the city’s Finance and Budget Committee and the city Treasurer said this week that the city does not, as of yet, have clear answers as they have not had the time to analyze the variety of scenarios possible in a fluctuating economic landscape.

Both told the RoundTable that no one is clear on how the payments would affect long-term finances. “I am fully in favor of getting to 100% funding by 2040,” said Committee Chair David Livingston earlier this week.

“The current debate is about how do you provide the resources to get and sustain those higher contributions.”

Livingston said, “Using excess reserves is not a sustainable approach.” He wants the city to take a more pragmatic, long-term view.

“I think there’s a lot of uncertainty with respect to next year,” he said, citing a possible 2023 recession and all of the city’s union contracts that are up for renewal and have not yet been settled. With so many factors in flux, there is a need for greater analysis and planning, Livingston said.

“We need a more robust study taking into account everything we know to develop that glide path to 100% by 2040,” he said.

There are a number of ways the city may seek to raise funds for pension contributions, including property taxes and asset sales, for instance. “Right now, the work has not been done to identify what the dedicated revenue sources are,” Livingston said.

How we got here

When the budget was introduced, Livingston explained to the City Council that because of the current financial landscape, the pension funds were under 60%. At the end of 2021, police pensions were funded at about 64%, Livingston said.

The state requires all municipalities to fund public safety pensions at 90% or more by 2040. But during this budget process, Evanston council members made it clear they would like to move to a path of 100% funding much faster. To do so this year would require increasing the annual pension contributions by an additional $4.5 million.

Another consensus among council members was also that the additional money for pensions would not come from a property tax levy as initially proposed in the budget.

Traditionally, that has been the way to fund pensions – a levy on property taxes. In the original budget, that would have meant a 4% levy, with about $21 million of that going to police and fire pensions, according to Livingston.

In a bid to prevent raising property taxes, the city has relied on an estimated $4.5 million in excess general fund reserves to fulfill pension contributions. With that, members voted 8-1 on Nov. 29 to move forward on the 100% funding as determined by the city’s actuary.

It has allowed more than one council member to say at various public meetings that “your tax hike won’t be coming from us.” Both the school districts have said publicly they intend to each levy the maximum property tax for 2023: For ETHS that is 5.5% and for District 65 that is 5.98%.

Questions

While all the percentage funding talk can be confusing because it doesn’t always tell you what you will pay, it is important to remember that when it comes to pension funds, the less the city pays each year, the more interest debt it racks up. Yes, just like your credit card.

But it is tricky. Credit rating firms are also watching municipalities. They weigh pension payments, sustainable strategies and long-term liabilities as well as consider transparency and accountability when determining bond ratings. If investors see a government addressing the pension issues with a sustainable strategy, bond ratings can increase, which save the city and taxpayers money. A better or higher bond rating will mean a lower interest rate on city bonds.

Through much of the 1980s and 1990s, the city ranked near the bottom of Illinois municipalities meeting its pension obligations. But in recent years, Evanston’s contributions exceed the state minimum required to reach 90% funding by 2040, said City Treasurer and Chief Financial Officer Hitesh Desai.

At a First Ward meeting Oct. 20 Desai talked about the issue.

“Over the past 10 years, the city of Evanston has contributed $35 million more than the [annually required] state minimum,” he noted. “But the dilemma for the City Council is if they want to contribute more, they have to levy more, and that means a burden on the residents of a higher property tax,” he said, acknowledging that council members face a tough decision.

When discussing it with the RoundTable Thursday, Desai agreed with Livingston, saying the information is still not there. “We need to get some idea of how the numbers look,” he said, before the city council makes a decision on the police and fire pensions, as well as the 2023 budget.