Champaign council to consider pension payback changes

Champaign council to consider pension payback changes

CHAMPAIGN — The city's finance director says a plan to extend the period of time Champaign would give itself to pay a smaller portion of its police and fire pension obligations is not at all like the state's strategy of deferring payments.

Quite the opposite, said Finance Director Richard Schnuer. The changes to the pension payment schedule officials will recommend to the city council next week keep the bulk of its commitments on a relatively short-term plan. But the new schedule will spread out unexpected fluctuations in those commitments seven years beyond the original 2020 pay-off date.

Ultimately that will make yearly police and fire pension payments — about $6 million this year and $6.8 million by 2020 — more predictable, and Schnuer said that will make it less likely that the city finds itself in a dire situation as it nears the payoff date. But it also means the city could end up paying a smaller portion of its pension obligations later than it originally planned.

The changes come as city officials look to stave off a structural deficit caused in large part by ever-increasing employee compensation and benefits. Schnuer said that, by allowing itself more time to pay off increases in its pension obligations caused by stock market fluctuations or other unforeseen events, the city can "smooth" the sometimes unpredictable annual payment it makes to police and fire pension funds.

Champaign, like cities throughout the state, has been working for 20 years to catch up on paying for pension benefit increases which state lawmakers have passed during the past couple decades. The city still has nearly $40 million in "unfunded liability," the amount it still needs to pay toward its pension funds to stay on track for paying benefits to retired police and firefighters and future retirees.

City officials and police pension board chairman Bill Neumann disagree about the dollar amounts. The pension board uses its own actuarial evaluation to arrive at an estimation of what it needs in that fund to be able to pay retirees later.

City officials say the unfunded liability for police alone is just under $25 million. Neumann thinks it's closer to $38 million. The numbers can differ based on a number of different factors including "mortality tables," which estimate the life expectancy of beneficiaries and therefore how long they will be drawing a pension.

The unfunded liability the city uses is "substantially lower than reality," Neumann said. City pension payments are based on those estimations, and a lower liability would mean the city is paying less into the pension fund than what it will actually end up owing.

"All that does is create more debt," Neumann said.

Still, the city is contributing substantially more to the pension fund than state requirements — an admittedly "low bar to get over," Schnuer said. But he is comfortable making the payments recommended by the city's actuaries.

"Reasonable people can disagree about these things," Schnuer said. "But are we establishing that in bad faith? I don't think so."

Compared to others throughout the state — and particularly the state itself — Champaign is relatively close to being caught up. While other cities have chosen to give themselves to 2033 or even as late as 2040 to pay off their commitments, Champaign has stayed on a 2020 payoff schedule.

"Champaign is better funded than most, and the amount of money we're putting in, by any measure, is very high," Schnuer said.

The group of cities still on that earlier payoff schedule is "a small club," Schnuer said. But as the date nears, the city has less cushion to absorb the fluctuations in the payments it needs to make, which depend largely on volatile investment returns.

The plan city officials will present to council members on Tuesday at 7 p.m. in the Champaign City Building would take any unforeseen increase in the city's unfunded liability and put a 2027 deadline on those payments. The $40 million in liability which exists today would remain on the 2020 schedule — anything above that would be pushed out seven years.

"We are not looking to cut our pension costs. We are not looking to be irresponsible with how we fund," Schnuer said. "We do want to deal with that volatility."

Schnuer solicited comment from the two bond rating agencies which set what is essentially the city's credit score. According to a memo to the city council, Moody's Investor Services analysts "stated that the proposed changes are conservative in comparison to public entities nationwide." The other, Fitch Ratings, does not comment on agencies it rates, but city officials think Fitch will view the proposal similarly.

Champaign has a "Aaa" bond rating, the highest a city can achieve.

Schnuer said he discussed the changes also with the firefighters' pension board, which adopted a resolution recommending the city council approve of the payment changes.

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