East Moline, Ill. Withdraws note as it turns to pension bonds
Illinois municipalities considering pension obligations to deal with pressure from public safety contributions received a gunshot this week as Moody’s Investors Service downgraded East Moline by two notches as ‘he’s preparing a POB.
Moody’s dropped the city to Baa2 with a stable outlook of A3 with a negative outlook.
The city sees its plan to sell $ 41 million in taxable general bonds to pay off its public safety net obligations as a prudent move that will save taxpayer dollars in the long run – if the game d he interest rate arbitrage is paying off.
Moody’s expressed concerns about the risky strategy, but said the borrowing itself did not cause the rating to downgrade.
Moody’s attributed its share to the sum of the city’s bond, pension and other post-employment benefit charges.
“The downgrade was really due to the high leverage,” said Ryan Patton, Moody’s chief analyst on East Moline, in an interview with Tom Aaron, public pensions specialist.
Looking at the pre-deal credit profile, analysts found the city had one of the highest leverage ratios to operating revenue among any municipalities it rates nationally. . “Fixed cost is an issue we’ve been watching for some time,” Patton said. The city’s total indebtedness from debt, pensions and the OPEB is 8.2 times operating revenue.
East Moline is a non-self-governing city of 21,000 people located in western Illinois, along the Mississippi River.
The use of POBs may not have been the driving force, but as a liability management strategy it poses “additional credit risk” and it’s “definitely negative credit,” Patton said. The rating agency last reviewed the credit two years ago.
The downgrading underscores the complicated image and stigma attached to POBs. Lenders present them as a good option when used in good economic circumstances, but the Government Finance Officers Association advises against due to the risk of arbitrage that investments bought with bonds earn less than interest than the issuer pays on POBs.
“Our general view on pensions is credit neutral at best and generally negative,” Aaron said. Current low interest rates might attract public borrowers “but those same low interest rates work against” the government and the pension fund as an investor.
“At the end of the day, not all POBs are the same,” and that counts in the credit review, Aaron said. It’s best to strictly repay debts, but others look like deficit financing with capitalized interest or proceeds to cover short-term contributions or deferred amortization schedules.
“Not all pension obligations are the same and not all pension obligations will have the same impact on credit,” Aaron said.
The East Moline Pension Bonds only pay off police and fire department pension fund debts and have debt service of about $ 2.8 million per year through 2040 and there is no no capitalized interest, Patton said.
East Moline officials have expressed disappointment with the downgrade because they believe Moody’s is overlooking the positive impact of using the proceeds to fully cover the city’s unfunded liabilities.
“They based their downgrading on the burden of pensions and the high costs of the OPEC. The pension bond bonds that we are preparing to issue are an effort to stabilize the growing pension burden through leveled debt service to address these concerns, ”said Annaka Whiting, Chief Financial Officer of East Moline, in an email.
Baird is an underwriter and Speer Financial advises the city. City council approved the loan on Monday. The loan will bring GO’s debt level in the city to $ 66 million.
“We have also received cooperation from our police and fire unions to limit retiree health insurance benefits for future employees, which will help reduce our OPEB liability,” said Whiting. “We are confident that we are moving in the right direction regardless of Moody’s rating decision.”
The city’s police fund was 51% funded and its firefighters 61% funded by the end of 2020, according to the city’s financial results. The city has declared unfunded pension liabilities of $ 67.1 million, $ 37 million for police and $ 30 million for firefighters. The city participates in the statewide Illinois Municipal Retirement Fund for its general employees and is well funded.
The city began exploring POBs as a way to reduce the accelerated rate at which the cost of pensions would rise over the next 10 years. “Debt service would stabilize these payments, thereby reducing the burden on the city and on residents,” Whiting said.
In addition to a GO commitment, the bonds are secured by tax receipts collected for police and firefighters’ pensions and for corporate purposes, distributions of taxes on replacement of personal property and fundraising. sales taxes distributed by the state.
Local governments outside of Chicago are required, by state mandate, to have public safety funds reach a 90% capitalization ratio by 2040. If local governments do not carry out ARC payment, pension funds for several years have the option of filing claims with intercepting various tax revenues or grants that pass through the state.
Whiting said the city had never been threatened with interception by the state. The Illinois Municipal League is pushing for legislation that would extend the date to 2050.
Moody’s said rising costs of the OPEC and pensions have contributed to East Moline’s operating deficits, but overall cash levels remain strong and city management has cut spending to stabilize operations in 2020 and maintain adequate reserves. Financial operations stabilized and the city benefited from abundant liquidity thanks to government and corporate funds.
The city is receiving $ 2.8 million, half of which is received this month and the other half next year, as part of the government’s American Rescue Plan Act allowance for coronavirus relief. Whiting said the city is still considering how best to use the funds as part of its budget process.
Pension-related borrowing is up this year compared to recent memories, said Lisa Washburn, director of credit at Municipal Market Analytics. At least $ 10 billion has been sold to date, although Bloomberg data includes a wider range of retirement funding, such as the $ 850 million Illinois issue which has only affected one. part of a retirement buyback program, Washburn said.
“Timing is critical,” Washburn said. “Those who issue POBs at the wrong time may end up having to pay debt service costs and cover additional contributions related to underperforming investments. I don’t think municipal governments should be able to gamble with taxpayers’ money.
Several other Illinois municipalities around the Quad Cities region that includes East Moline are also considering POBs, according to published local reports.
The Illinois Public Pension Fund Association, which represents public safety funds, last year encouraged local government leaders and fund managers to explore the POB option. It sets out the benefits and risks in a “newscast. “
The pension burden weighs heavily on the ratings of Chicago, the state government and some other struggling local governments due to a flawed funding system and legislation to date has made little progress in addressing the problem. quagmire, S&P Global Ratings warned in an August report.
According to a 2019 report from the Illinois Department of Insurance, lower-state and suburban public safety funds carried $ 11 billion in unfunded liabilities in 2017 – up from $ 10 billion a year earlier – with an average capitalization ratio of only 55%.