Kane Co. may issue risky bonds to fund pension liability
With a $5.3 million budget deficit looming for 2017, Kane County officials are on the verge of making a pension move some government finance experts believe has more risk than value.
The plan involves issuing $52 million in pension obligation bonds. The proceeds from the bonds would pay off the county's current unfunded IMRF pension obligation. The county pays about 7 percent interest to IMRF on the unpaid balance.
The county finance committee unanimously approved the plan Wednesday. It will go to executive committee, then the full county board for a final vote.
Based on the advice of Robert W. Baird, the firm that would issue the bonds for the county, officials say they believe the bond loan would carry a 3.5 percent interest rate. The savings from the lower interest rate would free up about $15 million for the county during the next 28 years.
The amount saved depends on two factors. First, the county must actually get a bond loan at 3.5 percent. Second, when the county gives IMRF the $52 million from the bond proceeds, it must realize the 7.5 percent rate of return IMRF projects for its long-term investments.
If IMRF earns more than 7.5 percent, the county would actually reap more than $15 million in savings. If IMRF earns something between 3.5 percent and 7.5 percent, the county will see less than $15 million in savings.
If IMRF earns 3.5 percent, the same as the county's bond interest rate, there will be no savings. And if IMRF earns less than a 3.5 percent return, the county would end up owning more money than it did to begin with.
In June, IMRF officials reported to Kane County officials a rate of return for the past year of 0.44 percent. That was the same month the county received a Distinguished Budget Presentation Award from the Government Finance Officers Association. But that association also issued a statement in January 2015 warning local governments against using pension obligation bonds.
The association's executive board said such bonds involve "considerable investment risk," making any savings "very speculative."
Despite that, governments sold $670 million in pension bonds during the first half of 2015 alone, according to a report by Stateline. Illinois issued $10 billion in pension obligation bonds in 2003.
John Hoscheit, chairman of the county board's finance committee, said he has no reservations about the bonds being a good deal for the county.
"We have a liability," Hoscheit said. "And (IMRF) is going to make us pay it. Instead of paying 7.5 percent (interest) to them, we can pay it off now at 3.5 percent (interest) to bondholders. It just makes logical sense to do it."
How much longer Kane County has a debt to IMRF is another area county officials will now focus on. County board Chairman Chris Lauzen said he will urge the county board's legislative committee to lobby state lawmakers to create a choice for local governments to opt out of defined benefit pension systems like IMRF.
"We are required to be in IMRF," Lauzen said. "If we had a choice, I would suggest that we vote not to be. If we had defined contribution plans (like 401(k)) in Illinois and in the counties, we wouldn't be having this discussion. We wouldn't have an obligation that goes out about 160 years. The more I learn about this system, the more I don't like it."