Why debt and public services may take back seat in East St. Louis

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East St. Louis, Illinois’ ability to make good on its debts and fund public services is under threat as its state funding is garnished to make up for pension contribution shortfalls, Moody’s Investors Service warns in a report published this week.

“The pending redirection is credit negative for East St. Louis because the city continues to experience fiscal imbalance, despite the decision to forego its required pension contributions to fund general operations,” Moody’s said.

“Generally, it is credit positive when a government increases contributions toward pension because paying more and sooner lowers future budget risk. However, a mandated increase in pension contributions is credit negative if it materially lowers a municipality's ability to deliver core services, because service insolvency increases the likelihood of a default on debt,” Moody’s added.

The city said Friday it’s working with at least one of its pension funds to reach a resolution.

The city has no general obligation debt but has outstanding tax increment financing bonds issued through the Southwestern Illinois Development Authority. The debt is not rated by Moody’s but the rating agency has been tracking the pension intercept issue for its impact on the local government sector.

State Comptroller Susana Mendoza received requests this fall from the city’s firefighters and police pension funds to intercept $2.2 million and $1.8 million, respectively, to cover 2017 and 2018 shortfalls in the actuarial contributions owed to both funds.

A handful of municipalities including Chicago have faced similar intercepts since the comptroller began enforcing the diversion mechanism last year. But the diversion has hit East St. Louis hard, as it did the Chicago suburb of Harvey last year.

Both are cash-strapped and impoverished municipalities that have grappled with dwindling tax bases, a loss of population, and poor tax collections leading to struggles to make good on all debts while also covering the costs of critical services.

The city did not fight the intercept claims but in response last month announced the closure of a fire station and firefighter layoffs. Those are now on hold.

“The city has postponed the layoffs for the time being. The Engine House No. 425 will remain open for now. The City is working with the Associated Fire Fighters of Illinois to reach a resolution with all parties involved. The Comptroller, however, will continue to intercept and hold our state revenues during this time,” city manager Brooke Smith said in a statement.

The city did not provide a comment on pending legislation being promoted by Gov. J.B. Pritzker that would consolidate the more than 600 individual police and firefighter funds for local governments outside Chicago into one statewide police fund and one firefighter fund. Some tweaks are needed due to opposition from some groups, but the plan may be taken up by lawmakers later this month.

The merger would have limited fiscal benefits related to investment earnings and administrative savings, but supporters say it's a good first step in addressing the $11 billion unfunded non-Chicago public safety pension burden.

East St. Louis underscores the difficulties many cities face although like Harvey it’s among the least able to manage its burden. The police fund is 35% funded and the firefighters fund is 11% funded.

Between 2011 and 2016, the bond trustee was forced to make nine unscheduled draws from the debt service reserve fund to make principal and interest payments, and reported missing the April 2016 mandatory sinking fund redemption. The city has historically used state sales tax revenue to support debt service on its TIF bonds.

The city has long struggled and in 1990 requested and received the designation of a “fiscally distressed city” by the Illinois Department of Revenue. That resulted in the appointment of an advisory authority to restructure its debt and oversee its budget. Following repayment of the restructuring bonds, oversight ended in December 2013.

“Continued operational imbalance, however, resulted in a deficit available general fund balance of $3.9 million, or negative 19.8% of revenue, in fiscal 2016,” Moody’s said. The city has not published fiscal 2017 and 2018 audits but the city faced operating deficit in both years and is struggling to balance its books this year.

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