This article is the first in a series by The Daily Northwestern exploring the City Council’s options in the upcoming budget season.
The City of Evanston is in financial crisis.
On top of a spike in foreclosures and a lull in commercial development, symptoms of the nationwide economic decline, the city faces a $140 million shortfall in the police and fire pension funds.
City officials recognized the severity of the problem in 2006, when the city reviewed its estimates regarding the pension plans. Last winter, the Evanston City Council raised its portion of the property tax by about 7 percent and transferred $2 million from the city’s General Fund to begin chipping away at the deficit.
The aldermen will begin working on the 2009-2010 budget in January, after interim City Manager Rolanda Russell releases her proposal.
Understanding the Deficit
Evanston police officers and firefighters depend on the pension funds because they do not receive Social Security, disability benefits or the standard retirement for city employees. Every year, they forward about 9.5 percent of their salary to their pensions.
The city also makes an annual contribution to fulfill its “unfunded liability,” the difference between the cost of the pensions and the amount forwarded from the salaries. The exact amount the city owes fluctuates depending on estimates of retirement patterns, life expectancy and other factors.
In 1993, the Illinois General Assembly passed a law requiring municipalities to fill their unfunded liability by 2033, which means Evanston has 25 years to produce $140 million on top of the cost of running the city.
Controversy began in 1987, when the Police Pension Board sued the city for neglecting the funds because it only made the minimum required contributions. Although the lawsuit failed, the judge ordered Evanston to hire an actuary to recalculate its unfunded liability.
The city hired Ted Windsor, who worked until 2006 when it was discovered that he was not accredited by the American Society of Pension Professionals and Actuaries. During his career, he insisted the funds were healthy and, on several occasions, supported the council’s decisions not to raise property taxes during the 1990s.
Windsor was replaced by an actuarial firm, Gabriel, Roeder, Smith & Co., in 2006.
The firm estimated a significantly higher unfunded liability, and city officials realized their dire situation.
The old numbers were flawed, according to former City Manager Julia Carroll, because the former actuary used an unrealistically high expected return on the city’s investments and ignored a 2001 law which allowed officers and firefighters to retire five years earlier.
“The actual results were different from the assumptions, which caused us to look at what we were using,” Carroll said in a budget workshop last winter. “People are retiring earlier and living longer.”
Windsor appeared at a budget workshop last winter upon the request of the council. He defended his estimates by describing the difference between him and the firm as a difference in planning, not calculation.
Windsor’s plan “pays costs up front as opposed to down the road,” he said at the meeting.
According to the firm, however, nearly two-thirds of the shortfall resulted from Windsor’s recommendation that the council put off payment in a time of prosperity, costing the city years of investment returns.
For some, the worsening condition of the pension funds was not news in 2006.
“The (pension) deficit has been coming on for a number of years and now it’s at what I consider to be crisis level,” said David Ellis, president of the Fire Department Foreign Fire Tax Board.
The council decided to stay with the new estimates from Gabriel, Roeder, Smith & Co. and began planning to make up the missing $140 million. Aldermen also appointed a Blue Ribbon Committee to examine the pension crisis and offer suggestions to the council about how to move forward.
Several members of the committee questioned the diligence of city officials as the problem mounted.
“Where were the finance manager and the city manager?” asked Peter Morris at a committee meeting this year.
Sandra Shelton, another committee member, shared Morris’ sentiments.
“They should have been asking more questions,” she said at the same meeting.
Weighing the Options
Looking forward to the upcoming budget season, the council will once again toe the precarious line between raising the property tax and cutting services.
Last year, aldermen considered cutting an elm tree injection program which protects the iconic trees, but decided to include it in the final budget after significant public outcry. Similarly, a proposal to close the North and South branches of the Evanston Public Library was debated but voted down.
These two programs are not expected to be contested this year, however, because aldermen agreed to make long-term investments in both.
Finance Director Martin Lyons, who was hired in August, jump-started the upcoming budget season by holding the council’s first budget workshop on Oct. 6.
Since then, several aldermen have identified programs they want their peers to examine in January when looking for ways to save money.
Ald. Ann Rainey (8th), for instance, suggested discontinuing the city’s scholarship program with Leadership Evanston, a non-governmental group that trains local leaders. At the workshop, Rainey argued that the individuals receiving scholarships were already qualified leaders and that the program wasn’t an essential service.
The council could also make a direct transfer from the city’s General Fund to aid the pensions. Although the aldermen moved about $2 million to the pension funds in this way last year, Lyons has warned against repeating direct transfers as a solution to the budget crisis because they are a one-time resource.
The council will hold one more budget meeting before January, when official workshops begin.
