Finance Commission

Village of Mount Prospect Finance Commission Regular Meeting Agenda 50 S. Emerson Street Mount Prospect, IL 60056 May 28, 2026 3rd Floor Executive Conference Room 7:00 PM 1. Call to Order 2. Approval of Minutes 2.1. February 26, 2026 3. Citizens To Be Heard 4. Old Business - None 5. New Business 5.1. Strategic Plan 5.2. Pension Funding Strategy and Bond Issuance 5.3. 111 E. Busse and Other TIF Items 6. Other Business 7. Chair Report 8. Finance Director's Report 9. Next Meeting - June 25, 2026 10. Adjournment NOTE: ANY INDIVIDUAL WHO WOULD LIKE TO ATTEND THIS MEETING BUT BECAUSE OF A DISABILITY NEEDS SOME ACCOMODATION TO PARTICIPATE SHOULD CONTACT THE FINANCE DIRECTOR’S OFFICE AT 50 SOUTH EMERSON STREET, MOUNT PROSPECT, ILLINOIS 60056 OR BY PHONE AT 847-392-6000. Page 1 of 10 Page 2 of 10 Page 3 of 10 Page 4 of 10  Village of Mount Prospect Mount Prospect, Illinois INTEROFFICE MEMORANDUM TO: MICHAEL CASSADY VILLAGE MANAGER, ALEX BERTOLUCCI ASST. VILLAGE MANAGER FROM: AMIT THAKKAR - DIRECTOR OF FINANCE DATE: APRIL 16, 2026 SUBJECT: PENSION FUNDING STRATEGY AND BONDS 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% liabilities total $57.3 million for the Police Pension Fund and $42.7 million for the 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). 1 Page 5 of 10 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: 2 Page 6 of 10 a) Credit perception and market view: POBs are often viewed as a speculative financing strategy. Credit rating agencies generally consider them a last-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 3 Page 7 of 10 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. 4 Page 8 of 10 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. Community Connection Center Development of the Community Connection Center is another high-priority initiative located at 1601 W. Algonquin Avenue, with 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. 5 Page 9 of 10 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. Staff will continue to evaluate pension funding strategies and potential financing options and will present further analysis to the Village Board and the Finance Commission in the near future. Please let us know if you have any questions or require additional information. Thank you. Respectfully submitted, Amit Thakkar, Director of Finance 6 Page 10 of 10