CHICAGO — The Evanston City Council will likely vote early next year on whether the Illinois city should sell $116 million of pension obligation bonds to help fund a growing pension liability that contributed to Moody’s Investors Services’ move yesterday to strip the city of its top credit marks.Moody’s downgraded the affluent Chicago suburb’s $209 million of outstanding general obligation debt to Aa1 from Aaa.The bond issue is one of several strategies under consideration to help wipe out the $140 million police and fire pension fund’s unfunded liability. The current funded ratio is just 44% for the police fund and 41% for the fire fund. A $116 million bond issue would boost the funds’ ratio to 90% and generate $20 million in present-value savings to the city, according to city manager Julia Carroll.Other options include boosting the funds’ equity investments to the state cap of 45%, and placing a referendum on the February ballot asking voters to decide whether to raise the real estate transfer tax to $6 per $1,000 from the current level of $5 per $1,000. Part of that new revenue would go toward the pension funds, Carroll said.
“We are continuing to work with our City Council on exploring the options that we have to address the pension funding issue,” Carroll said. “Obviously we’re disappointed that Moody’s would downgrade us, but I think we’ve been working hard to address their concerns.” It’s unclear when the council would vote on the bond issue, but Carroll said she hopes to see a transaction completed within the first quarter of 2008. The city has not yet chosen an underwriter. In 2006, Evanston contributed about $8 million to the funds, while in 2008 that figure will increase to $12.1 million, and in 2009 to $12.6 million to meet the annual actuarial-based contribution level, said finance director Matthew A. Grady 3d.A pension obligation bond issue would increase the city’s already high debt burden, noted Moody’s analyst Shawn O’Leary. Evanston’s current direct debt burden of 2.9% — well above the national median direct debt burden for triple-A rated cities of 0.8% — contributed to the rating change. The agency cited high debt levels and the unfunded pension liability in its downgrade.Under the proposed bond issue the debt burden could grow to 3.8%, but the city’s history of retiring nearly 80% of its outstanding principal within 10 years allows for manageable future debt borrowing, O’Leary wrote.Despite its pension liability and the higher-than-average debt burden, Evanston enjoys a strong and diverse tax base, the prestige of Northwestern University, and a location along the north shore of Lake Michigan next to Chicago, and is likely to remain a “very healthy credit,” O’Leary wrote. At the lower rating, the agency assigned a stable outlook. The credit had carried a negative outlook since late 2006.City managers plan to submit the proposed 2008 budget by the end of December. The budget will likely be balanced through a combination of cuts and tax and fee increases, including a property tax increase, Carroll said. The City Council has until Feb. 28 to approve a final budget.Evanston still carries a AAA with a stable outlook from Fitch Ratings. Standard & Poor’s doesn’t rate the credit.