Evanston credit rating downgrade driven by pension liabilities

Edward Cox, Assistant Summer Editor

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Moody’s Investor Services’ downgrade of Evanston’s credit rating last week may make it more expensive for the city to borrow money as it seeks to pay off outsized pension liabilities.

The downgrade dropped the city one rung below a perfect credit score for the second time in about two years. The city carries about $260 million in pension liabilities, according to calculations used by the credit-rating agency. However, those calculations are more conservative than Evanston’s estimates, Moody’s spokesman David Jacobson said.

(Moody’s downgrades Evanston’s credit rating)

The latest estimate from Moody’s lowered the discount rate of the city’s pension funds. Jacobson said the change in discount rates was a result of dampened economic conditions in recent years, when high earnings from pension assets became unrealistic. This decrease caused expected earnings of existing pension funds off of interest to fall.

By Moody’s calculations, the city’s pension liabilities grew in part because of the change in the discount rate. Previous estimates by city actuaries held the pension liabilities at more than $170 million, compared to the latest estimate of nearly $260 million.

“We believe this gives a better sense of what the true liabilities are. We want it to achieve a greater transparency of assets,” Jacobson said. “This is not intended to tell what the city should do.”

A high credit rating could save the city money when it sells bonds by demonstrating that it is able to pay back interest.

Evanston was deemed one of the “significant outliers” in its Aaa rating category along with Chicago, which had unfunded pension liabilities of $26.8 billion at the close of the 2012 fiscal year. Moody’s placed 27 other local governments across the nation under review for potential credit downgrades.

However, the Moody’s report released June 27 stressed the city has a strong economic foundation supported by an “affluent and diverse tax base” courtesy of local health care institutions and Northwestern.

Prior to the downgrade, the city used more conservative calculations to determine the true values of pension liabilities and assets of public employees, including firefighters and police. Evanston fire department Chief Greg Klaiber said firefighters’ pensions are about 50 percent funded. The unfunded pension liability for firefighters stood at about $62 million, according to the city’s report for fiscal year 2012.

The city will continue to stick to its own actuarial measurements unless Moody’s calculation methods are accepted on a state level, said Marty Lyons, Evanston’s chief financial officer.

Assistant summer editor Edward Cox can be reached at edwardcox2011@u.northwestern.edu. Follow him on Twitter at http://www.twitter.com/EdwardCox16.

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