CHICAGO - Chicago and its south suburban neighbor Harvey have struck a $20 million settlement that resolves a dispute over the suburb's delinquent payments for city supplied water.

The settlement announced Jan. 20 brings to a close the city's dispute with Harvey, which also involved several other municipalities that receive city water through Harvey.

"This settlement amounts to a fairer deal for Chicago taxpayers and ensures that all four municipalities will finally make good on the water payments they owe," Chicago Mayor Rahm Emanuel said in a statement.

Harvey - which sells Chicago water to and collects revenue from five downstream municipalities - halted its regular payments to Chicago in 2008. The settlement requires Harvey to pay current Chicago water bills in full and on time with a past due principal amount of $18.5 million paid off in monthly installments over seven years at a 3% interest rate. The city is forgiving about $6 million in late fees.

The settlement stipulates that Harvey use water-related revenues to first to pay for water-related purposes, including its payments owed to Chicago, before tapping the funds for other purposes.

Harvey had steered water fees to its general coffers to support operations. Chicago will be permitted access to Harvey's financial system and Harvey will be required to provide accounting reports related to its water fund, a statement from Chicago read.

If Harvey defaults on its payment obligations, the unpaid balance plus interest will be due immediately and any amounts will be paid directly from the water fund or Harvey's general fund account. The other municipalities will now send their water payments directly to Chicago.

It's unclear how the financially struggling Harvey, which operates on a $38 million budget, will cover the past due payments.

The city recently settled charges involving its misuse of bond proceeds to prop up operations as it struggled to pay its bills. A federal judge recently signed off on Harvey's settlement with the Securities and Exchange Commission over charges it misled investors.

The SEC's June complaint marked the first instance in which the agency sought an emergency court order to halt a municipal bond offering. The injunction was sought by the agency when it discovered during the course of an investigation into the city's use of past bond issues that it was planning to issue more bonds.

SEC investigators found that Harvey had diverted about $1.7 million over the course of 2008, 2009 and 2010 offerings that were supposed to finance a hotel and conference center. The unfinished project was abandoned. The official statements made no mention of proceeds being diverted.

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