CHICAGO — Harvey, Illinois’ revenue bondholders will require that the cash-strapped city stay up to date on its Illinois Municipal Retirement Fund contributions as part of a global settlement on the future intercept of city revenues to cover overdue public safety pension contributions.
The trustee’s position is based on a new development in the first case enforcing an intercept mechanism for overdue contributions in 2011 public safety pension funding legislation: the state comptroller has concluded that the intercept rules extend to the IMRF.
“The IMRF could come in and take the money,” Brent Vincent of Bryan Cave Leighton Paisner, which represents the revenue bond trustee Amalgamated Bank of Chicago, said at a court hearing Friday. “We have a clean revenue stream and we want to keep it clean.”
“The easiest way to do it as opposed to litigating” the issue “is to make sure Harvey makes its contributions,” Vincent said.
“They have the right to file a claim with the comptroller for whatever amount they are owed and under the pension statute the comptroller then attaches the money” until the claim is satisfied, said Michael H. Moirano, of the firm of Moirano Gorman Kenny LLC, of Chicago, representing the police pension fund. “They have a claim pending before the comptroller….until that claim is wiped out, we are at risk, everybody is at risk that the IMRF” can seek to divert funds.
The city has been meeting its roughly $120,000 annual obligation to the IMRF through diversions allowed under alternative state laws that allow the intercept of some funds through Cook County and of one revenue stream through the comptroller based on its status as a “state agency.”
The IMRF, a fund for non-public local government employees excluding Chicago and Cook County's government, is 89% funded, significantly higher than many Illinois retirement funds, and far higher than Harvey's two local public safety funds, which are teetering toward insolvency. It had not sought to intervene in the Harvey situation.
Harvey owes the IMRF a minuscule amount of about $200 but the trustee's concern is that any future IMRF claims filed would get in front of the distribution of funds under an expected global settlement between Harvey, the public safety funds, and the revenue bondholders.
That’s a big risk for bondholders because they would then take a back seat on their claim to the city’s share of the 1% municipal share of state sales taxes.
The city pledges that revenue stream along with its home rule tax to bond repayment. The comptroller has concluded that home rules taxes don’t qualify as a “state fund” under the intercept law and will continue to flow directly to bondholders while the 1% municipal share is a “state fund” that is subject to intercept.
The trustee disagrees and absent a settlement with Harvey would need to litigate the dispute. By including the requirement that Harvey remain up-to-date on IMRF contributions, it eliminates the risk future IMRF claims would block its access to the 1% municipal share of sales taxes.
The IMRF was pulled into the city’s public safety quagmire last week as part of an interim settlement that allows for the $2.3 million that has so far been intercepted to be shared by the city, bondholders, and public safety funds.
Comptroller Susana Mendoza’s decision that the legislative changes also apply to IMRF means that fund can seek the diversion of “state funds” collected by the state and distributed to local governments, complicating the settlement talks about future diversions.
The comptroller's office put in place the diversion system this year and the Harvey police fund was the first to file a claim seeking to garnish revenues to cover a $7 million judgment. The firefighters followed with a $12 million claim to satisfy a court judgment on contributions due.
The diversions became public earlier in the spring as Harvey made deep cuts to its public safety ranks as the comptroller withheld funds. The court in late May blocked the distribution of $2.3 million in intercepted revenue as the city, its public safety funds, and holders of the $6 million of revenue bonds backed by the city’s hotel taxes and its share of state taxes and local sales taxes haggled over who had the right to how much of the intercepted money.
The temporary restraining order permitted the parties to continue settlement talks in an effort to allow the city to avert what it warned was an impending shutdown of services.
The parties agreed to an interim settlement last week that modified the TRO to allow for the one-time payments of the $2.3 million with the city receiving 65%, the police fund receiving 25%, and the firefighters’ fund 10%. The totals are after the deduction of the city’s share of the 1% share of state sales taxes, which will go to the bondholders’ trustee under the interim agreement in an agreed order entered last week.
The latter revenues are not needed for debt service and so would be remitted to the city. The city directs the trustee in the agreement to send 25% of the revenue to the police fund, 10% to the firefighters, with the remainder going to the Illinois Municipal Retirement Fund to bring the city up to date on contributions.
During a court hearing Friday, the interim agreement nearly fell apart as the various parties argued over how much should be set aside to go to the IMRF. The funds and bondholders wanted $100,000 put in escrow but the city's attorneys argued for less given the city’s severe cash flow problem.
The comptroller’s office had a $76,000 claim on file but the latest documents showed that it had been narrowed to just $8,500 and other information showed that the fund owed the city a refund.
“That’s where the so-called sticking point is,” Harvey attorney Bob Fioretti, of Fioretti Roth LLC, said in court. The latest figures put the number owed by the city at $200 based on funds diverted by Cook County and the comptroller but no official certification could immediately be obtained from IMRF.
In the end, the city agreed that the trustee would leave $100,000 in escrow in hopes that it would be freed up early this week.
Negotiations are continuing on a “global” settlement going forward with the bondholders stressing that it would require that Harvey remain up-to-date on future IMRF contributions to avoid any future claims interfering with the settlement.
The change in IMRF’s claim status was triggered by a comptroller's office review of the pension code and other applicable laws now that it has the new intercept in place. The IMRF had previously been submitting claims to cover overdue pension contributions in its role as a state “agency” that allows it to collect on just one revenue stream.
“If they have new claims going forward” the comptroller will no longer recognize them under the state agency act or state comptroller act; instead “they will have to certify and follow this procedure” under the pension code changes like the police and firefighters, a comptroller official said.
The IMRF currently intercepts the revenues of 30 local governments. The shift in its status has an upside for the retirement fund in that it will now have access to a wider pool of funds, but the downside is that it will now have to compete with police and firefighters accounts for revenues depending on the timing of claims.
Harvey’s $7.1 million pot of city revenue that flows through the state each year is made up of the city’s home rule sales tax, video gambling taxes, motor fuel tax allotments, the municipal 1% share of sales tax, personal property replacement tax, and a telecom tax, according to comptroller's office.
Municipal bond market participants have worried about a flood of public safety claims under the changes because hundreds of pension funds are underfunded and have not received actuarial based contributions. The IMRF is healthy and it's only had to pursue funds from a limited number of governments to meet its obligations.
The new development may further fuel worries over general obligation bondholders' positions in payouts for distressed municipalities because they now must get behind three pension funds, instead of only two, in competition for limited revenues. Some rating agencies have also expressed concerns that local governments could be strained to meet debt service and funding for services if their revenues are intercepted to fund pensions.
Under the pension code article that governs public safety funds, local governments outside Chicago must make contributions to police and fire accounts at a level to reach a 90% funded ratio by 2040. Under the IMRF's article, employer contributions when combined with member contributions and investment income must be sufficient to provide future benefits for its own employees.
Under the pension code changes, the intercept mechanism allowed for the full amount of a claim to be intercepted beginning in fiscal 2018. Mendoza's office put a claim process in place earlier this year. At the hearing last week, comptroller spokesman Abdon Pallasch said the only other public safety pension claim to be received — an $863,000 claim by North Chicago’s firefighters fund — has been settled.