City says it’s turning a corner on pensions

December 18, 2018 GMT

STERLING – After choosing a favorite among three tax levy options at its last meeting, the City Council formally approved an increase of 3.91 percent Monday.

The levy estimate comes in at $4,908,575, an increase of $184,829 from last year. Because land valuations are up 4 percent, the end result is a small decline in the proposed property tax rate. The rate also dropped slightly last year.

“It’s taken a while, but we’re finally ahead of where we were with EAV before the recession,” City Manager Scott Shumard said.

If the median home value of an owner-occupied home of $83,300 remained unchanged, the homeowner would pay $1.12 less than the previous year for the city’s portion of their property taxes.

Sterling taxpayers were due for some relief after levy increases of 6.06 percent and 18.76 percent were instituted in 2016 and 2015, respectively.

Property taxpayers have been pressured by escalating police and fire pension costs, and the state’s new rules for determining how the cities fund them. The state mandates that cities fund the pensions at 90 percent by 2040, and has threatened to seize local government distributive funds from municipalities that don’t adequately fund pensions.

The levy passed by a 5-to-1 vote, with Alderman Jim Wise casting the lone “no” vote. Wise had supported a 1.26 percent levy increase – the lowest of the three levy proposals – which would have cut the property tax rate from $2.95 to $2.87. The other option not chosen was the highest of the three – an increase of 4.97 percent.

The 1.26 percent increase would have met the statutory minimum funding level as determined by the city’s actuaries, Naperville-based Lauterbach & Amen. 

“The city wants the higher property tax levy because they have accelerated the amortization schedule of payments for the pension funds with the goal of the funds being 100 percent funded by 2036,” Wise said.

Wise said that since the nearly 19 percent levy increase in December 2015, the accelerated funding schedule has cost Sterling property owners an additional $2.8 million in taxes.

This year, fire pensions were up 9.09 percent, while police pensions rose 8.11 percent. The city’s fire pension funding ratio increased 1.3 points to 49.64 percent and the police pension funding ratio rose 1.03 points to 54.73 percent. The state average for downstate fire and police pension funds in 2016 was 57.1 percent and 57.9 percent.

Supporters of going above the minimum funding level say they are trying to avoid more years of double-digit levy increases.

“If we’re going to strive to level out levy increases as discussed in 2017, we have to put in more in the low years if there is hope to put in less in the high years,” Shumard said.

Several factors have been at play in the struggle to fund the pensions. Investment return expectations for the funds have been lowered from about 7.5 to 6 percent, and when those targets aren’t met, cities lose more ground against the debt. The recession took its toll on EAV, retirements were on the upswing, and mortality tables have been adjusted to reflect longer life spans.

“As far behind as we are, we need to be aggressive,” Shumard said. “We have to stop creating more debt for the next generation, who will be paying for past police and fire costs.”

Wise suggested that next year the city look at adjusting its pension funding target to 100 percent by 2040 instead of 2036.

“I understand the reasoning, but the system sets us up for failure,” Wise said. “This debt will still get passed on to the next generation and we’re overtaxing our residents.”

Pension benefits are set by state statute, and without reform from Springfield, cities are stuck with a broken system and they must figure out how to best work with it, Wise said.

Next meeting

p.p1 {margin: 0.0px 0.0px 0.0px 0.0px; font: 12.0px Helvetica} The City Council next meets at 6:30 p.m. Jan. 7 in the first-floor Council Chambers at City Hall, 212 Third Ave.

Go to sterling-il.gov or call City Hall at 815-632-6621 for an agenda or more information.