Illinois city's sewer system sale won't cure its pension woes
CHICAGO -- The pending sale of the Alton, Illinois, wastewater treatment system to bolster the city's pension contributions to its nearly insolvent public safety funds couldn’t stave off a downgrade.
S&P Global Ratings on Thursday dropped Alton’s rating one notch to A from A-plus and assigned a negative outlook due to the weight of the unfunded public safety pension tab on the city’s balance sheet.
The city will funnel proceeds from the pending sale of its wastewater treatment plant and sewer system to Illinois American Water and Management to bolster funded ratios and ease the near term trajectory of contributions.
"While we recognize the sale presents a measure of budget predictability in the near term, the city will still have a significantly high pension liability and exposure to escalating pension contributions, and we believe it will need to devise a long-term plan to stabilize its policemen's and firefighters' pension funds," S&P analyst Helen Samuelson warned. The tab will “continue to pressure credit quality.”
The city is strained by a weak economy and poor budgetary performance underscored by a general fund operating deficit although the city did record an operating surplus for all governmental funds, S&P said.
Alton is located on the Mississippi River across from Missouri near St. Louis and is home to about 26,000 residents.
The city’s credit profile benefits from strong budgetary flexibility with a fund balance in 2017 equal to 27% of operating expenses and strong liquidity. The city has low bonded debt levels of $10.2 million that include $2.3 million of enterprise bonds scheduled to be amortized quickly.
The pension tab and the “lack of a plan to sufficiently address the obligation” is the primary drag on the profile.
The city council earlier this year signed off on the privatization of its wastewater plant and sewer system in a deal selling the facilities to Illinois America Water for $53.8 million.
The sale – which still needs state approval -- is expected to be finalized in early 2019. The city has told S&P it will direct all funds to one or both funds and will not use it to cover near-term contributions.
The sale also benefits the city as the company will cover Illinois Environmental Protection Agency mandated capital work and other needed repairs with the costs for residents expected to be lower because of the company’s economies of scale.
Without the infusion of cash, the public safety funds were on course in the coming years to exhaust assets which would force the city to move to a pay-as-you status. Both are between 17% and 18% funded.
The city has made actuarially determined contributions since 2009 under an agreement with the police and firefighters’ funds but they could not make up for the shortfall created as previously set-in-statue payments allowed the funds to flounder.
“Additionally, we believe some of the assumptions that go into the calculation of the ADC are weak, and lead to a lower ADC in the near term, further delaying the city's progress in boosting funding levels,” S&P said.
State law requires most local governments across the state to reach 90% funding by 2040 on their public safety funds with annual ADC payments or face the diversion of state funds if requested by the pension funds. Several local governments, most notably the Chicago suburb of Harvey, have faced such action with warnings that many more could follow as state reports say public safety funds are collectively funded at under 60% with a total unfunded tab of nearly $10 billion.
Actuarial reports indicate the infusion will improve funding levels and lower future pension costs by about $2 million per year for each plan. The city paid a total of nearly $7 million last year.
The city's combined net pension liability for the two funds totals $184.3 million, or 17% of its market value and $7,021 on a per capita basis.
The city is also exploring whether to build a $40 million facility that would take wastewater product and convert it to natural gas. The city is considering issuing revenue bonds payable from net revenue of the facility. S&P said they were told it’s unlikely the debt would be backed by the city's GO pledge.