East Moline got a credit rating just two notches above “trash,” after voting to withdraw more than $ 40 million in bonds, to pay police and firefighter pensions.
EAST MOLINE, Ill. – East Moline was given a credit rating just two steps above “trash” after the city voted to approve police and fire department general pension obligations.
Moody’s Investors Service said the move involved risks and increased the chances of losing East Moline’s investment, but said the rating had been revised to stable from negative.
On September 7, the city voted for $ 41.2 million in general bonds, at historically low interest rates, to cover unpaid police and firefighter pensions. The idea is to invest the bonds and then hopefully get a 4-7% return on your investment.
Currently, East Moline has nearly $ 18.3 million in unfunded firefighters’ pensions, as well as around $ 22 million for the police. According to the 2011 reforms of the Illinois public workers’ retirement system, city governments must fund 90% of these liabilities by 2040.
RELATED: East Moline Considering $ 40 Million Bonds to Pay Police and Fire Department Pensions
A financial report from Baird found that at its current rate, the city is expected to contribute $ 3,030,100 into the pension fund this year, with that amount increasing each year. By 2039, East Moline would be paying $ 6,772,300 per year just to meet its deadline and the necessary funds.
City administrator Doug Maxeiner argues that with the bonds invested, East Moline will pay a fixed rate of $ 2.8 million per year, without raising taxes. By the 2040 deadline, those numbers show nearly $ 30 million in savings, as opposed to an increase in annual payments.
However, there are risks associated with the move, which could impact future investments in the city, according to Wirepoints, a nonprofit research and commentary group focused on improving Illinois.
“Moody’s gives East Moline a credit rating by saying, hey, that’s two notches from the junk. That’s a really bad rating,” said Ted Dabrowski, president of Wirepoints. “This is a very bad signal for a very bad idea.”
Dabrowski argues that municipalities should never contract bonds against taxpayer money to gamble on the stock market.
“It’s a risk that Moody’s doesn’t like,” he said. “This increases the cost of borrowing for East Moline in the future. If the city were in trouble, it could lose its ability to borrow when it needs money the most. ”
He also said it sends a worrying signal to investors.
“They say, why do I want to invest in a city that is about to be classified as junk and borrows a lot of money and gambles with taxpayers’ money,” he said. “Think of it like a credit score, that the worse your credit score, the more interest you have to pay. The worse your credit score, the less you can borrow in the future. The lower your credit score, the less people trust you – or businesses trust you. ”
Instead, Dabrowski is in favor of cities like East Moline working to change the law and pushing the Illinois government to find a new solution to the state’s retirement problems.
“What you do is fund pensions, but then put taxpayers at the mercy of the $ 40 million,” he said. “If the stock market crashes, guess who will be responsible if it doesn’t work out? Ordinary people in East Moline.”
In a statement, East Moline City Administrator Doug Maxeiner said the city is moving in the right direction, regardless of the credit score report:
“I am disappointed with the downgrade of Moody’s and do not feel it reflects the current state of the financial affairs of the City of East Moline. They based their downgrading on the pension burden and the high costs of the OPEB (other post-employment benefits). The Pension Bonds The Bonds (POBs) that we are preparing to issue are an effort to stabilize the growing pension burden through leveled debt service to address these concerns. help reduce our OPEB liabilities. We are confident that we are moving in the right direction regardless of Moody’s rating decision. In addition, I would like to stress that Moody’s stance on POBs is neutral, recognizing the effort to stabilize growing pension costs while also recognizing the risk investment of the strategy.
Taking out bonds with the intention of investing is nothing new to cities and counties.
Rock Island County was considering a similar move earlier this week, as officials debated underwriting $ 30 million in bonds to cover unpaid retirement funds.
RELATED: Rock Island County Board Plans To Borrow $ 30 Million To Help Unfunded Pensions
However, on Thursday morning, Rock Island County Administrator Jim Snider revealed those talks had been filed. In a statement to News 8, he said:
“Our closer examination of our actuary this week, our IMRF unfunded pension liability appears to have fallen to around $ 2 million instead of the estimated amount report last Tuesday of $ 23.7 million. This is due to the very Recent strong stock market performance of our estimated IMRF funding level. Obviously, future stock market performance could cause this unfunded portion to increase. However, at this point there is no need to further examine the POB.
The county had processed funds through the Illinois Municipal Retirement Fund (IMRF) and said the unfunded portion was deemed negligible. Snider said there was no longer a need to consider a general obligation (POB), due to the outperforming IMRF stocks.
“Our returns on investment have improved dramatically,” he said. “This unfunded level always fluctuates with the stock market. Due to the confirmation of IMRF’s investment level, at this point the market performance has – to date – eliminated this unfunded liability.”
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