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Home My WebLink About9.3 Pension Funding Strategy and Bonds DiscussionSubject Meeting Fiscal Impact (Y/N) Dollar Amount Budget Source Category Type Information Item Cover Page Pension Funding Strategy and Bonds Discussion July 21, 2026 - REGULAR MEETING OF THE MOUNT PROSPECT VILLAGE BOARD VILLAGE MANAGER'S REPORT Presentation Pension Funds — Current Status Achieving a AAA credit rating from the major credit agencies remains a key strategic priority for the Village. To support this objective, the Village has implemented several financial policies and initiatives, including a strengthened fund balance policy, the establishment of an Economic Stabilization Fund, creation of a Pension Stabilization Fund, disciplined pension funding practices, and optimized property tax levies. According to the most recent actuarial valuation, the Police Pension Fund is 66.4% funded, and the Firefighters' Pension Fund is 69.6% funded. The corresponding unfunded liabilities total $57.3 million for the Police Pension Fund and $42.7 million for the Firefighters' Pension Fund, for a combined unfunded liability of $100.1 million. The Village has adopted a funding strategy to reach 100% funding of its pension liabilities by 2040. The most recent annual pension contribution totaled $11.8 million, of which $8.9 million was supported by the property tax levy and $2.9 million was funded through alternative revenue sources, including the Pension Stabilization Fund and grocery tax revenues. The following table reflects the levy for the upcoming year (2026 payable in 2027). Norma o Administrative Costs Amortizatiori ofUnfunddl Lilabitlty ppLicabIle, iiites ,Lovee Contr ib u i onu Pension Stabitlization Fund rlicr%llccinn vn= ml� WAS To further improve pension funding levels while minimizing pressure on existing revenue streams and property taxes, staff evaluated several potential strategies, as outlined below. Pension Obligation Bonds (POBs) Pension Obligation Bonds (POBs) are a financing mechanism used by governments to address unfunded pension liabilities. Under this approach, a municipality issues taxable bonds and deposits the proceeds into its pension funds, effectively replacing a variable, actuarial liability with a fixed debt obligation. Conceptually, this can be compared to refinancing a mortgage at a lower interest rate, potentially over a longer term. Currently, the Village is amortizing approximately $100.1 million in unfunded pension liabilities at an assumed actuarial rate of 7.25% over 15 years. In contrast, the Village could potentially issue bonds at approximately 4.5% and amortize the obligation over a longer period, such as 20 years. The interest rate differential suggests potential savings. However, this strategy carries significant risks and remains controversial. Key considerations include: a) Credit perception and market view: POBs are often viewed as a speculative financing strategy. Credit rating agencies generally consider them alast-resort tool for governments struggling to meet pension obligations. While POBs may be viewed more favorably if implemented as part of a comprehensive financial plan, standalone use can negatively impact credit perception. b) Taxable borrowing requirement: Current regulations do not permit the use of tax-exempt bonds for pension funding. As a result, POBs must be issued as taxable debt, typically carrying interest rates approximately 1.2% to 1.6% higher than comparable tax-exempt bonds. c) Conversion of soft liability to fixed obligation: Pension liabilities are long-term, actuarially determined obligations that can be adjusted over time. Issuing POBs converts this flexible liability into a fixed, legally binding debt obligation with scheduled repayment requirements. d) Market volatility risk: Bond proceeds are invested in pension fund assets, which are subject to market fluctuations. In the event of a market downturn, investment losses could reduce the funded ratio, while the Village would still be obligated to meet both pension contribution requirements and fixed debt service payments on the bonds. Given these considerations, staff does not recommend the use of Pension Obligation Bonds at this time. Sales Tax Diversion Strategy Currently, the Village allocates approximately $6.0 million annually toward capital projects, with $2.0 million directed to the Capital Improvement Fund and $4.0 million to the Street Improvement Construction Fund. Staff evaluated an alternative approach in consultation with bond advisors, whereby $5.0 million of existing sales tax revenues would be redirected annually to the pension funds ($2.5 million each to Police and Fire). To offset this reallocation, the Village would issue tax-exempt bonds to fund street and other capital projects, potentially incorporating capitalized interest to align with the expiration of existing debt. Under this scenario, the Village effectively replaces a portion of its pension liability (approximately $5.0 million at 7.25% over 14 years) with tax-exempt debt at approximately 4.28% over 19 years. This structured arbitrage would shift a portion of the financial burden from pension contributions to debt service. IFI CVI ea i(December I 2026, 2027 202 2,1029 2030 2031 2032 203 2034 2035 2036 ! 3 2038 2039 2040 2041 204 204.3 204 2045 ESIPated TI C "", Debt Service Paid ftomHome Rule Sales Tax s, V 26, HOM IIExistling Debt ++L & ' ` a x T ot a II An, n uI Paid frome [ I ncludes Sates, Tax, Debt RuIeSales, Tax, Capfltalizedh 'wy lh ^ (11 I er ] 2 Payments, , , 3 1 , ,50 Ig 4,114,110 2BQ010884,394,1198 � ,3 ' 1y,, l rnZ3 ' , 61Z,375, 31,8471576 _ 1,231,425 1I M 231 A5 u�rivv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�vv�wu ,�iiiiiiiiiiiiiiiiiii . %, , Although these bonds would be supported by sales tax revenues, they qualify as tax-exempt obligations, and the Village retains the authority to levy property taxes for debt service if necessary. In practice, a corresponding reduction in the pension levy could help offset the incremental debt service levy. This approach could be implemented over a period of up to four years, or until the pension funding ratio reaches 80%, whichever occurs first. Once this threshold is achieved, the Village could transition back to a traditional funding model targeting a 90% funding level by 2040. In future years, the Village may also consider allocating audited General Fund surpluses toward pension funding, either independently or in combination with limited bond issuance. However, staff recommends maintaining strong fund balance reserves until the AAA credit rating objective is achieved. Sales Tax Allocation General, Fund - Operating Genera I. Fund Transfer's - ebb is . . ........... b .............. 20 Ft he General, Fund T'ransfears - Plenslons Business DistrictAllocation Current Vs, C u me nt Sate s Proposed,Sales Proposed, Tax Attocation Tax Atto"Cation gyp'n 2,0,000001.00 2,000,000.00 44,000,0100.001 441000�000.001 a This allocation is expected to save $5.9 million in the Fire Pension levies and $5.6 million for the Police pension levies from 2026 to 2040. Fire Pension Levies tf,,nding F1'ohcv,Canlribcitionj to by, 10015,� f tided Basehn,e IC: aselhrie IEXI'Dra $2.50 Extra $2.rya 0 Current Funded Current Funded Reduction, Year by 2,040 Percentage by'204.0 Percentage Additional 1 n Levy 20125 5, 335, 64% 6, 3 3 6, 64%, - 201216 5:61 8 1 64%, 810018111 64% 2,500 2027 5,706 66%, 7,9,68 618 111),61 2,500 (237) 20,28 5,4801 71% 7,483 74% 2,500 (497'') 20129 51361 74% 7'$079 '791% 2 500 (782) 20301 6 P 3 06 77%, 411'209 18,31% - (1, 01 n) 2031 51,454 78�%, 4,318 84% (1, 13 6) 20132 5,6018 80% 411433 85% 1 20133 51,766 82%, 4,5501 187% (1 ,216) 2034 93 0 83 4,671 188%, (1,259) 2035, 6:1106 8�51%, 4,803 89!% (1,3012) 2036 6,280 88�%, 4,932 9 1 OX6 1, 314,8�) 20137 6#46'0 901%, 51 ,066' 93% (1,394) 20138i 61644 92%, 5,202' 94% ('1 44 3) 2039 6P782 961%, 6,290 Police Pension Levies B „ I it IpP 'i e li," s e l flI e Extra $. 50 E, t, ra $ 5 (,, ) Current Funded a rre Funded Re,duction Year Iby 2o40 Percentage by 2040, IPercentage Additional In Levy, 9,365 The Finance Department conducted a session with the Finance Commission, and the Finance Commission unanimously supported this concept. The Village Resource Center Development of the new Village Resource Center is another high -priority initiative identified in the Village's strategic plan. The Village is in the process of acquiring property located at 1601 W. Algonquin Road, with the acquisition funded through Tax Increment Financing (TIF) revenues. The property is located within the South Mount Prospect TIF District, which currently generates approximately $1.8 million in annual increment. Staff is finalizing construction and improvement cost estimates and proposes funding the project through the issuance of tax-exempt bonds. The TIF is expected to experience significant growth in increment, particularly upon completion of the anticipated data center project. Even under conservative assumptions excluding the data center, current TIF revenues are sufficient to support the proposed financing. A $5.0 million bond issuance amortized over 20 years is estimated to require annual debt service of approximately $395,000. Based on current revenue levels, this results in a strong debt service coverage ratio of approximately 4.5x. IJOI & :" ! IIIWALIP&ION -01610A 10, 11Lk 0 CA 14 a;LbOU &&d ZhAl 614 2:14M. 4 0,111 Fiscal Year (Deecernber 31) 2026 2027 2,028 2029 2,030 2031 2032 2033 2,034 2,035 2,036 2037 2,038 2,0339 2,040 2,041 2,042 2,043 204-4 204 5 Debt Sri iPaidifrom SOUth MOW tPnrO, pect TIF Revenue, �G,M+25 I" EsUrnated Prospect TIF Aran SOLO Series 2026 Revonue Delbt Mount Prosped [PAidfrom TIF Service TIF Revenues Rev ,] (1) ayments s $ $ 1,800,000 394,329, 394' 329, 1,800"000 393,6751 393,675 1,81001.10010 395,675, 3-96,675, 1,800,000 392,175, 392,175 1,800"000 393,425 3,93, 425 1,800"0000 394,175, :394,175 1,800"'000 394,425, 394,425 1,800"1000 394,17-5 3914175 1,800"000 393,,425, 393,425 1,800"'000 392,175. 392,175 1,800"000 395,425, 396,425 1,800"'000 39Z300, 3921 �300, 393,650, 300,650, 1,800,000 394,243, 39142'13 1,800"000 393,968, 393, 988 1,81001,000 392,975, 3$2,975 1,800"'WO 396.175 396, 175 1,800"'000 393,325, 3S,3,W �325 1,800"000 39.4,688 ------------ 394,689 $ 7,484,392 4.561 4,.,57x' 4, $5X 4.,5,9x' 4.,58X' 4,,57,x 4,5"1 4.57X' 4. 58x 4,50 4,.,5,5x' 45 .ft' 4� 57X 4,.,5'7x' 4.57X' 45SOXX4 4., x 4.•561'x Estimated rIC' 4,18% Estimated Proceeds. 5,000,000, $ 5,000,000 (`I) ates based, UIXII lmar!<et C"OrKi"bors as Of'April 110,, 2026 a-rd recent lxwl' oswesvticli PNIA bel*velsl to be ac,Ctrateai"d relkable,, PILIS, 10.25%6. NOTE: Scenarfos, wbere a greater poirtion f the overall debt is issued in, advame o,f the exponditures of the pro,coeds will likely resuft in Ilhigheir feos earned by the Mvestment rnanager of, the, debt proceeds. AItP-rnafivP--q 1. Provide direction to the staff supporting bond issuance in 2026 for street projects and the Village Resource Center and divert $5.0 million in sales tax in 2026 towards additional pension contributions. 2. Action at the discretion of the Village Board. Staff Recommendation Staff recommends the Village Board support the above pension funding strategy, diverting $5.0 million in additional sales tax funding for the pension in 2026, and issuing bonds for street projects and the Village Resource Center in 2026. Attachments None