Why an Illinois city is challenging a state pension withholding law

Register now

CHICAGO – The lawyer for a fiscally distressed Illinois city will challenge a state law that allows public safety retirement funds to intercept a municipality’s state-collected revenue to cover delinquent pension contributions.

“The law is vague” and “lacks a review process beyond the discretion of the comptroller,” Harvey's attorney, Robert Fioretti of Roth Fioretti LLC, said Friday.

Fioretti said the challenge would be included in an amended complaint he plans to file on the city’s behalf later in the day or Monday. He declined to discuss it further saying the city’s more urgent effort is focused on securing a preliminary injunction that would free up funds being held by Comptroller Susana Mendoza.

Challenging the law that allows for the diversion would have a more sweeping impact because a long list of municipalities are behind on their pension contribution schedule and could face similar action.

Harvey is the first municipality stung by the law and received widespread attention because of the city's deep fiscal woes. With about $1.4 million in state-collected funds frozen, the city cut deeply into the ranks of its public safety staff.

The city – which has previously defaulted on bonds – earlier this month lost its first legal shot at freeing up the cash when Cook County Circuit Judge Raymond Mitchell on April 9 declined to grant a preliminary injunction against the comptroller’s enforcement of the pension fund’s request.

The appellate court later reversed that decision and sent it back the lower court for a hearing. The comptroller continued to hold the funds and the police fund intervened and petitioned the high court.

“Reversing the trial court, and then directing the court to grant all the final relief the city seeks, without explanation … is not only wrong it is fundamentally unfair,” the police fund argued. “There is no justification for the appellate court’s decision, other than the financial plight of Harvey, which is the product of a dysfunctional administration that the appellate court previously found was mismanaging its funds.”

The Illinois Supreme Court acted on Thursday, vacating the appellate ruling without elaborating on its legal reasoning. It, too, sent the matter back to the circuit court for a hearing.

The $1.4 million of diverted funds based on a $7 million police fund judgment has risen to $1.79 million, according to Fioretti. A settlement with the city’s pension funds – the firefighters’ fund has an $11 million judgment – offers another avenue in which some portion of funds could be released. “The city is still in negotiations with the pension funds,” he added.

The 2011 law requires local governments outside of Chicago to fund their public safety pension plans at a level to reach a 90% funded ratio by 2040. Beginning in fiscal 2016, pension funds became empowered to intercept state grants to municipalities in a gradually increasing amount reaching 100% this year.

If a municipality falls 90 days in arrears on the actuarially based payment schedule, the fund may, after giving notice to the municipality, certify the delinquency with the comptroller and the office must deduct the certified amounts or a portion from various state funds that flow to the municipality.

Prior state comptrollers did not implement a certification process, leaving it Mendoza, who took office midway through fiscal 2017. In addition to the Harvey funds, the comptroller has received a certified request from North Chicago’s firefighters' fund.

Once a fund certifies a pension funding shortfall the onus falls on the local government to contest and show evidence to the contrary. Harvey contested but the comptroller has not found evidence to dispute the request. The office holds on to the funds for a 90-day review.

The city’s current suit argues that the city’s property can’t be garnished to satisfy a judgment under state law; that a portion is “pledged to bondholders with greater rights than the pension fund”; and that future levies have been appropriated to meet the pension judgment. It also argued that with a $6 million deficit, the funds were needed for essential services and state law prohibits the garnishment of funds needed for essential services.

For reprint and licensing requests for this article, click here.
Public pensions Budgets Lawsuits Illinois