Fitch Ratings has stripped Evanston, Ill. of its top credit rating ahead of its sale of $12.7 million of general obligation debt, primarily because of the city’s pension funding woes.

Fitch lowered the rating to AA-plus from AAA. Proceeds of the sale will finance various public improvement projects and allow the city to make a deposit into certain debt service funds of the city’s sewage system for purposes of paying certain outstanding obligations on their respective scheduled payment dates.

The downgrade also impacts $154 million of outstanding debt. The outlook is stable at AA-plus. The credit hit “reflects Fitch’s concern over persistent long-term risks associated with the sizeable unfunded pension liability in the city’s police and fire plans,” according to the agency.

“Despite the city’s efforts to reduce the liability through periodic supplemental contributions, the systems are severely underfunded,” Fitch wrote. Evanston, located across Chicago’s northern border, benefits from sound reserves despite operating deficits and enjoys home rule status that affords it financial flexibility to raise revenues. Fitch noted that the city has not chosen to “take full advantage” of that flexibility.

The police plan is just 46% funded and fire plan just 45% funded. The city carries $173 million of unfunded liabilities in its three retirement plans.

While employee and employer contributions are set in statute the city’s supplemental payments are considered a positive factor. The city has consistently exceeded minimum employer contribution and recently exceeded the actuarially required contribution level.

“Fitch believes tangible, long-term results from the city’s active management of its pension liability is key to rating stability,” analysts wrote.

Moody’s Investors Service also recently lowered the city’s rating by one level to Aa1 after it changed its rating methodology revising the weight and measurements of financial metrics compared to a government’s pension status.

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