Harvey, Illinois, gets temporary relief from pension fund diversion

Register now

CHICAGO – Harvey, Illinois, and its public safety pension funds agreed to divvy up $2.3 million in revenues that had been withheld by the state for overdue retirement contributions as the city warned it needs cash this week to meet payroll and keep critical services running.

“All the parties…have agreed to a distribution of the current funds that have been intercepted,” Harvey’s lawyer, Bob Fioretti of Fioretti Roth LLC, told Cook County Circuit Court Judge Raymond Mitchell during an emergency hearing Wednesday. “We have to have this done by tomorrow. There will be no Harvey after Saturday.”

With the city pressing for the urgent release of the funds under an interim settlement, Judge Mitchell early Thursday signed an agreed order modifying the temporary restraining order he put in place on May 23. The TRO prevented Comptroller Susana Mendoza from distributing the cash to the police fund.

The order allows for the one-time payments of the funds that the controller has so far intercepted with the city receiving 65% of the $2.3 million, the police fund receiving 25%, and the firefighters’ fund 10%. The totals are after the deduction of the city’s share of state sales taxes, which will go to the bondholders’ trustee under the interim agreement.

The sales tax funds going to the trustee likely won’t be needed for debt service and would be remitted to the city. The city, however, 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, a statewide fund that covers general employees outside Chicago.

The money will be divvied up as follows, according to the controllers office: $1,27 million to Harvey; $196,643 to the firefighters' pension fund; $491,608 to the police pension fund; and $387,274 to bondholders, some of which will go to the IMRF.

Before the TRO was put in place to allow for more time to negotiate a settlement, the comptroller’s office had been was set to release the $2.3 million to the police fund. The release was pending after the office wrapped up a review in which its concluded the fund had met the criteria under a 2011 public safety funding law that allows for the diversion of a municipality’s share of state-collected revenues to make up for overdue pension contributions.

The city is working to balance its needs with its obligations under a law that requires it to reach a 90% funded ratio for public safety pension funds by 2040. The city in April cut deeply into its public safety ranks because it couldn’t afford payroll demands after the withholding began in February.

The settlement impacts only the $2.3 million that’s so far been intercepted.

The parties are still trying to hash out a permanent settlement that would allow the city to pay off a $7 million police fund judgment and a $12 million firefighters judgment while also holding on to about 65% of the funds. City lawyers hoped to finalize a settlement as soon as Friday.

At stake is about $7.16 million of annual revenue based on the city’s 2017 totals.

Comptroller spokesman Abdon Pallasch said after the Wednesday hearing the office would expedite the distribution but would need a couple days. The city’s attorneys said officials were in discussions with bankers and believed the city could get by until the funds were received.

The interim order preserves the first claim the city’s revenue bondholders believe they hold on the city’s share of sales tax revenues. Both home rule sales taxes and city’s share of state sales taxes shared with local governments were pledged to the holders of $6 million of 2008 hotel-motel sales tax revenue bonds.

The pledged revenues have always flowed directly to the trustee Amalgamated Bank of Chicago. The comptroller’s review concluded that home rule sales taxes don’t meet the designation of “state funds” under the intercept statute and so $278,000 that was intercepted over the last few months were freed up last month and sent to the trustee.

The review, however, concluded that the state-imposed sales taxes Illinois shares with all local governments did fall under “state funds” and would be diverted.

The bond trustee disputes that position and the firm’s attorney, Brent Vincent of Bryan Cave Leighton Paisner, said in court that in any settlement, interim or final, the bondholders would preserve their claims on all pledged revenues.

The sales taxes, under any settlement, would flow to the trustee first, but it needs only about $650,000 to $680,000 to meet annual debt service and the home rule sales tax revenue may be sufficient to cover it. That means that most of the general sales taxes may be freed up and remitted to the city. The interim agreement sends the cash to the pension funds.

The $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, its share of the state use tax, and other state funds including a video gambling tax, motor fuel tax allotment, and the municipal 1% share of sales tax, personal property replacement tax, and a telecom tax, according to comptroller's office.

Attorneys for the police and firefighters fund displayed a newfound sympathy for the city’s fiscal plight in pushing the comptroller’s attorneys from Illinois Attorney General Lisa Madigan’s office to agree to the interim settlement Wednesday. The office, which had only just received it, eventually agreed and said it could accommodate a quick release but the trustee could not immediately get clearance from lead bondholders and so the order was not entered until Thursday.

If a global settlement is reached, the city’s lawsuit challenging the diversion would be dismissed, leaving unanswered the municipal market's questions about the priority status of competing claims from the funds and whether the statute gives the pension funds greater status on revenues than bondholders. Harvey’s lawsuit argues that critical services and bondholders have a superior claim to the pension judgments and its revenues can’t be diverted to cover judgments.

Some fear a flood of other pension funds could follow the Harvey funds’ lead because there are several hundred that have been shorted by their government sponsors.

Moody’s Investors Service warned in a recent report that the comptroller’s certification of the police fund’s diversion represented a credit negative for all of the state’s local governments as it further reinforces the idea that holders of Illinois local government bonds fall behind pension funds.

For reprint and licensing requests for this article, click here.
Public pensions Pension funds Revenue bonds Court cases Illinois