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East Moline considers $40 million bonds to pay police and fire pensions

The city has proposed investing in general obligation bonds, and argue smaller, more frequent payments, would bring higher risk and higher prices.

EAST MOLINE, Ill. — As the Illinois Quad Cities try to figure out how to pay a state-mandated pension fund for police and firefighters, East Moline is proposing roughly $40 million in general obligation bonds, to help cover the costs. 

A public hearing, for residents to give their opinions on the bond consideration, will be held at City Hall at 6:30 pm, September 7. 

 "We are about $40 million in unfunded liability for both police and fire," said City Administrator Doug Maxeiner. "And the cost of funding that unfunded liability is growing almost exponentially." 

2011 reforms to Illinois' public workers pension system now require city governments to fund 90% of those liabilities by 2040. 

In East Moline, those unfunded costs come out to nearly $18.3 million for firefighters, and about $22 million for police. 

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A Baird financial report found that at its current rate, the city would have to pay $3,030,100 into the pension fund this year, with that amount going up annually. By 2039, East Moline would be paying $6,772,300 a year just to meet their deadline and necessary funds. 

"That's in addition to the normal cost for active employees," said Maxeiner. "As that requirement or that burden grows, it's consuming more and more of our property tax yield on a regular basis, and it's taking it away from our ability to provide regular services. We just have to use that money to pay for the pensions." 

As the pension costs continue to rise, Maxeiner says other services around town will become harder to fund. 

"So we can't provide the same number of police officers on the street. We can't provide the same number of firefighters to respond to those emergencies. We can't provide those park services. We can't take care of the roads. I mean, we're struggling to take care of the roads now. It's going to get worse as that pension liability grows and we can't keep up with it." 

It's why East Moline is now examining the benefits of turning toward a general obligation bond instead. The idea would be to take it out now, while interest rates are historically low, and hopefully get return investments that would not otherwise be available for smaller payments. 

"I don't view it as a high risk," said Maxeiner. "The best predictor of the future is the past. So we look at what our historic investment returns have been. And our actuarial report uses a return of about 6.5% - 7% every year for police and fire pension funds. And we actually think that may go up a little bit." 

He says even if the returns average out to even 3.5%, the city would be saving money. 

Under the proposed bonds, East Moline would pay an estimated $2.8 million each year - at a fixed in rate - and taxes would not be raised. By 2039, the difference between the bond rates and those without one, is about $3.9 million dollars. In total, East Moline estimates it would save $30 million dollars over the next two decades, if it invests in these bonds. 

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"The difference here is the savings over time. There isn't a whole lot of savings in the first year or two, but towards the tail end of these bonds, it's nearly $4 million savings annually. So the aggregate of that over that 19-20 year period is is $30 million, based on these estimates," he said. 

However, not everyone is on board with the plan. 

Ted Dabrowski is the president of Wirepoints, a not for profit research and commentary group focused on improving Illinois. He worries that when it comes to debt problems, borrowing isn't the solution. 

"The government wants to borrow a whole bunch of money for cheap, because rates are really low right now," he said. "If they do better, that's good for the pension funds. But if they lose out on their investments, it's the taxpayers who are on the hook. It's high risk for sure." 

Dabrowski argues that a bond wouldn't be solving the issue, just taking out more money East Moliner's will have to make up. 

"What if East Moline gets into the market at the top of the market and we're only down from there, 20-30%, and we have no idea what the market's going to do," he asked. 

Instead, Dabrowski says that state-level overhaul needs to change the pension statutes, making it more affordable for cities to pay, and increasing the willingness of residents to stay in Illinois. 

"We have to give our residents options, and borrowing is not one of them," he said. 

Maxeiner counterargued that the bonds wouldn't be managed by East Moline, saying reforms have led to the consolidation of 641 Illinois police and fire pension funds. Those are all being combined into two statewide boards - one for fire, one for police - that would invest the money on behalf of individual municipalities. 

"They would tell the member communities what they have to participate in for the fund, and then they have an overall investment manager that invests those funds," he said. Both boards are still being assembled. 

East Moline's City Council hopes to vote on the bond proposal as soon as September 20. If passed, voters would have 30 days to gather over 841 petition signatures to force it to a referendum in June 2022. 

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