Skokie is latest Illinois community paying pensions by borrowing
The village of Skokie issued $176 million in new bonds to fund shortfalls in public safety pensions. The village joins a growing list of municipalities forced to borrow to meet “unsustainable” pension obligations.
Skokie, Illinois, is borrowing $176 million in bonds to cover shortfalls in what the village’s finance director called “unsustainable” public safety pension costs.
The bond sale comes amid a growing trend of pension obligation borrowing by Illinois local governments.
Skokie Finance Director Julian Prendi said $135 million will be used to pay down unfunded pension liabilities to the required 90% ratio far ahead of the 2040 deadline. An additional $13.5 million will be budgeted for unexpected costs.
“The primary motive is to control the growth of the annual funding requirement, which, because of the state-mandated 2040 funding deadline increases to unsustainable levels in the out years,” Prendi said.
The new bonds will raise Skokie’s general obligation debt nearly five-fold.
Despite the Government Finance Officers Association recommending against the practice, a growing number of local governments have turned to issuing bonds to fund budgets strained by rising pension payments. Wheaton, Berwyn, Moline and East Moline all recently borrowed to pay for pensions.
The association has warned pension obligations borrowing can have mixed impacts on issuers’ credit ratings given the risk that investment earnings could fall short of debt service payments, driving up overall costs. Higher-rated governments can typically better absorb the market and budgetary risks.
But given Skokie’s AA+ rating by Fitch Ratings and AA credit by S&P Global, village leaders said they are confident the move will benefit Skokie in the long term by easing upcoming pension contribution spikes.
The Skokie police pension account is currently 72.3% funded and the firefighters’ plan is 55.9% funded for a combined total of 64%.
Statewide, police and firefighter pension debt has grown to $7.5 billion and $5.5 billion respectively. A failure to fund these annually growing plans to 90% by 2040 would ultimately see local taxes and grant revenues diverted from core services to make up the difference.
State leaders have the option to amend the Illinois Constitution to allow for changes to future, not-yet-earned pension benefits to curb the growth of future liabilities.
A solution outlined by the Illinois Policy Institute could 100% fund state pensions by 2045 – rather than the 90% target the state shows no sign of meeting – and save $50 billion. The alternative is to cut earned retirement benefits or further overextend taxpayers.
Or continue borrowing and forcing local communities to increase property taxes and other taxes and fees in a state that already leads the nation in state and local tax burdens.