Du Quoin agrees to sell pension obligation bonds
The city of Du Quoin is going to take advantage of the current low interest rates on bonds as a way to pay off most of its unfunded pension debt - and hopefully pull in additional cash besides.
Pension obligation bonds have been around for more than 45 years, but have gotten more popular over the last 10 years with municipalities struggling to keep up with escalating pension costs. Du Quoin raised property taxes by 15% in December in order to cover its pension debt for 2021 - and had to pull another $170,000 out of the general fund besides to meet the obligation, according to Chuck Novak, Du Quoin's special projects coordinator.
When bonds are selling for under 3% is the time to issue them, Novak said, which is now. Du Quoin intends to sell enough bonds to cover 90% of its pension debt, or about $7.2 million. The bonds are repaid over 40 years, as the proceeds from the sale are invested in the pension fund, ideally earning enough interest not only to pay the monthly cost of the bonds, but bring in additional money as well.
Pension obligation bonds are considered risky by some analysts - the Government Finance Officers Association has historically urged municipalities to avoid them, arguing that the invested proceeds may fail to earn more than the interest rate owed over the term of the bonds, putting a community in a deeper hole. As well, in some cases they can use up much of a community's debt capacity for the 40-year life of the bonds, which can be problematic if a community needs to invest in infrastructure.
Novak, however, said Du Quoin is accounting for those possibilities by also setting aside $500,000 in a contingency fund.
"I'm hoping we have no major events between now and then (2040)," Novak said Wednesday, "and then that half million could be used to bring (pension debt) funding up to 100%. That would be the best thing that could happen."
On Wednesday, the Du Quoin city council put the bond sale ordinance on public view. In a few weeks, the council is then expected to pass it, triggering the bond sale within the following few weeks. Stifel, Nicolaus & Company has been engaged to handle the sale.
Novak said he's hoping the interest rate is less than 3% when the sale is made, "but we won't know until the day the bonds are sold," he said. He added the city is hoping to attain an A rating or even A-plus.
Du Quoin, he added, is financially able to do this, because it has been paying its pension costs all along. The city's police pensions are about 52% funded and the firefighters' pensions are about 40% funded.
Some communities have funded their pensions only 19% or 20%, meaning their unfunded pension debt is so large that pension obligation bonds would never find a buyer, Novak said.
Once the bonds are sold, the city's $490,000 annual bond payments will remain pretty steady, Novak said. The city is obligated to keep paying into the pension fund - $293,000 in 2022 and then an increase to $306,000 the following year.
Mayor Guy Alongi doesn't think the taxpaying public in Du Quoin wants to see taxes rise every year from now on to pay for escalating pension costs. He and the city council are on board.
"I think we need to cut the snake's head off one time, borrow as much as we can," Alongi said at the recent city council meeting, referring to whether the city wanted to borrow enough to cover just 90% or the full 100% of its pension debt.
Ultimately, however, the city settled on 90% and the $500,000 contingency fund.
At that meeting, Alongi urged swift action.
"I'm a conservative person and a conservative borrower, but I think the low rates have just about bottomed out," the mayor said. "The only way they'll slow the economy down is to raise interest rates."