CHICAGO - The Chicago suburb of Rosemont plans to sell $37.5 million of taxable general obligation bonds next month to bring its public safety pensions up to near full funded status.
The sale comes at a credit cost.
Moody's Investors Service lowered the village's rating one notch to A3 and assigned a stable outlook. The village previously carried a negative outlook.
Standard & Poor's affirmed its A rating and stable outlook. The village will have $368 million of GOs after the issue.
Mesirow Financial Inc. is the underwriter and Merrill Ring serves as the village's financial advisor. The sale is set for mid-January, said members of the financing team.
The aim of the issue "is to get us to a near full funded level and take the pressure off the operating budget" of funding public safety pensions, said Rosemont's finance director, Don Calmeyn. The pension fund is now about 62% funded.
While the sale removes those future pressures, the bonds' structure pose some future fiscal risks and Moody's frowns on the village's plan to use debt to cover operations.
Principal payments don't begin until 2022 and the village intends to finance annual pension contributions with interest earnings generated from the investment of the bond proceeds.
"With the current borrowing, the village is issuing long term debt for recurring operating expenses, which we consider to be a weak practice," Moody's said. "Furthermore, if the village's projected investment returns are not realized, the village could experience an increase in unfunded pension liabilities and associated operating costs, as the village intends to make up any shortfalls in interest earnings with general fund contributions to the pension fund."
The finance team countered that the structure allows it to monetize future revenues expected when existing bonds are retired and a tax-increment financing expires, and to capitalize on low interest rates. The village established its public safety pension fund trust in 2007 with proceeds from a $35 million. It made contributions of $4.1 million in 2013 and $4.5 million in 2014 but with the infusion of new proceeds believes future contributions will be limited.
The A3 level reflects the village's important role in the Chicago region's economy because of its location adjacent to the city and O'Hare International Airport. The village benefits from strong sales tax revenue collections from the commercial sector as home to hotels, restaurants, a convention center, outlet mall, arena, and theater, with several of the enterprises owned by the village of 4,000.
The village has also recorded several years of improved general fund operations although its reserves remain "insubstantial" relative to its debt obligations.
Its strengths are countered by what Moody's called an "extremely high debt burden," ongoing declines in its tax base valuation over the last five years, and risks associated with numerous commercial enterprises that are non-essential to municipal operations. The village's improved operations also hinge on development and economically sensitive revenues.
Moody's last year lowered the village's rating to the A2 level.
Standard & Poor's said it considers the village's economy weak due to below-average income and economically sensitive village-owned enterprises and high debt levels, but it benefits from very strong budgetary flexibility and adequate liquidity through unrestricted cash.
Local governments across Illinois are struggling to meet a state mandate to shift to an annual actuarially required contribution to fund public safety pensions from one based in statutes.
The change takes effect with the 2016 contribution and some local governments have warned they can't afford the higher payments are clamoring for benefit reforms. Rosemont is acting on its own to shore up its public safety pension funds; it's not subject to the state law.
