The City of Evanston’s finances have deteriorated due to budget and pension plan issues. The police and fire pension plans both have a funding ratio below 50% and remain critically underfunded.
The police and fire pension plans continue to be adversely affected by the recession and market downturn for a number of years. The City is faced with its own problems and an approximate $8 million budget gap for the 2010 fiscal year. As part of the solution to this problem, the City must first correct its own financial situation so that it can then aid the police and fire pension plans, but the City may not be ready to take such steps.
The police and fire pension plans will continue to have issues that have been aggravated by the recession and related loss of investment return for a number of years that need to be addressed by the City.
In determining the unfunded accrued liability, the actuary “smooths” investment losses and spreads them over four years so as to help reduce the effect of short-term fluctuations. Thus, a portion of losses from 2007 and 2008 will still be reported until 2012 and will hamper the pension plans’ investment returns in those years.
Furthermore, although the stock market has seemed to stabilize, the plans are still faced with issues due to the stagnant stock market of the last decade. In determining the required plan contributions, the actuary assumes that the plan assets will earn a 7.25% rate of return each year. If the pension plans do not earn that rate of return, then the plan assets will not increase at the rate expected and the unfunded liability will increase as a result.
Given the low market returns of the last decade, notwithstanding the recent positive rebound last year, it may be very difficult for plan trustees to earn the required 7.25% rate of return, so the plans’ unfunded accrued liability will most likely increase over the coming years.
The City has taken steps to reduce the $8 million budget gap to put it in a position to aid the pension plans, but there is a current resolution before the Board of Aldermen that raises concerns.
Despite the City’s financial condition, the City may sweeten its municipal employees’ pensions. In an alleged effort to recruit new workers from out of state, a proposal is before the aldermen that would allow city workers to boost their pension benefits.
Under the proposal, municipal employees would be able to purchase up to ten years worth of extra pension credits by paying the required employee contribution portion of the pension credits. The City would then pay for the increased pension benefits through higher future contribution rates. This could certainly affect the City’s finances adversely in the future.
The police and fire pension plans are not eligible for the out-of-state service credits, but roughly half of the City’s department heads would qualify. Tim Schoolmaster, a trustee of the city’s police pension plan, said the proposal would amount to a giveaway to top-level city workers.
Under a typical defined benefit plan, the City and employee make contributions over the career of the employee.
These contributions earn an investment return over the twenty-plus years of the employee’s career which helps then fund the employee’s pension in retirement. However, if an employee is able to purchase ten years worth of credit and retire shortly thereafter, then the City must bear a disproportionate amount of that pension liability.
The City will have to pay for its portion of the contributions to the plan and then it also must pay for all of the lost return that would have accrued over the ten years of service.
This proposal is especially interesting given Illinois Constitution Article 13, Section 5: “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”
The duty to provide for pensions through proper funding is the equivalent of the obligation of paying on the bonds the City has issued.
We certainly have learned through our work in Springfield, Missouri, and from the task force report we reviewed in Omaha, Nebraska, that the bond rating agencies may be the ultimate force to get cities to fund pensions properly. Failure to do so may be catastrophic to a city’s bond rating, which will dramatically increase the cost of future debt obligations that the City issues.
The Board of Alderman should not approve this measure without fully assessing its costs and benefits.
According to Alderman Coleen Burrus, 9th Ward, the City already attracts workers from other states, so there is no need to provide further incentive. Furthermore, the current unemployment rates as of January 2010 for the United States and the City of Chicago were 10.6% and 11.7%, respectively, so there is clearly no shortage of potential job applicants nationally or locally.
Though municipal employees are not as vulnerable as the general public to layoffs, there should be a large number of qualified persons available without a pension “giveaway.”
Most importantly, this measure will also cause a financial strain on the City when it is required to make higher future contributions to pay for the pension sweetener. During a financial crisis, honoring existing obligations is more important than creating new benefits, even though this may seem positive or attractive to some.
Failure to do so would be disgraceful and a slap in the face to the uniformed officers and firefighters who protect Evanston’s citizens on a daily basis.
Even though the City is looking to make deep budget cuts and to remove personnel positions, it is also contemplating sweetening pensions for roughly half of the City’s department heads. What is wrong with this picture?
The Board of Alderman’s approval of this resolution would indicate that the City has learned nothing from the past few years or this financial crisis.
The residents of Evanston should require the City to take real action to correct the financial issues plaguing the City’s budget and the police and fire pension plans. Police officers and firefighters, who put their lives on the line for the residents of Evanston, are not covered by Social Security. They are totally dependent on their pensions.
If the citizens of Evanston want to both honor their constitutionally guaranteed pension obligations to the police officers and firefighters, and have a “pension giveaway” to attract high level City employees, then the citizens need to increase their taxes dramatically.
As noted previously, the conservative residents of Springfield, Missouri increased the city’s sales tax by 0.75% in the midst of the Great Recession. Some form of tax increase is probably necessary in any event to help solve Evanston’s problems.
We recognize the difficulty that this places on the residents of Evanston. Property taxes are already perceived to be high. The business community is almost never supportive of tax increases, but when things become desperate enough, business people often are willing to face the realities.
In Springfield, Missouri, we were pleasantly surprised when key members of the Chamber of Commerce supported a ¾ cent sales tax increase to fund police and firefighter pensions. The Chamber membership was certainly divided on the issue, but leadership was determined and the tax passed in early November 2009, in the middle of a severe recession, when unemployment was even higher than it is now.
Difficult problems can be solved over time, but ultimately, funding problems require money. That is an inescapable fact.
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