Harvey keeps pushing for settlement in face of Illinois pension intercept

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CHICAGO – Lawyers for Harvey, Illinois and its public safety pension funds return to court next week when a judge will weigh whether to leave in place an order blocking the state comptroller from distributing $2.3 million of intercepted state revenues to the police pension fund to cover overdue contributions.

Cook County Circuit Court Judge Raymond Mitchell on Tuesday granted a temporary restraining order sought by attorneys for the city and the firefighters’ fund after the police fund pulled out of the latest round of settlement talks. The Illinois comptroller's office had been set to release $2.3 million of intercepted revenue to the police fund Wednesday.

In announcing his ruling, Mitchell concluded that a future damage award could come too late for the firefighters’ fund – which was only 15% funded in fiscal 2016, according to Moody's Investors Service – while he saw “relative little harm” in granting the temporary delay in distribution.

The TRO did provide relief for the city’s revenue bondholders by freeing up $279,000 withheld from Harvey’s home rule sales tax collections since February when the comptroller received the police fund’s diversion request earlier this year to cover an outstanding $7 million judgment.

The $279,000 was sent Wednesday to Amalgamated Bank of Chicago, trustee for $6 million of revenue-backed hotel-motel sales tax revenue bonds, said comptroller spokesman Abdon Pallasch.

Comptroller Susana Mendoza concluded her review Monday of Harvey’s protest of the police fund’s certified request, finding that the police fund was eligible to receive the city’s share of state sales taxes, but that the home rule revenue didn’t fall under the category of “state funds.”

The 2011 public safety law with the intercept feature which is now being enforced allows for the diversion of only “state funds.” All of the city’s state and local sales taxes were pledged to bondholders and sent directly to the trustee under a 2008 bond ordinance. While bondholders now will get only the home rule taxes, the funds are sufficient to cover roughly $600,000 of annual debt service.

In requesting the TRO to block distribution of the $2.3 million, the city and firefighters’ fund joined forces. The city has warned it can’t maintain critical services and meet payroll if the comptroller is allowed to continue withholding its share of “state funds” until the police fund’s $7 million judgment and the firefighters’ $12 million judgment are paid off.

The city and its funds were close to a settlement that would have freed up 75% to 80% of “state funds” with the remainder – along with some additional funding component from the city -- going to the two funds, according to Harvey’s attorneys, Bob Fioretti and Kenneth Hurst of Fioretti Roth LLC.

The firefighters' fund wants an immediate piece of the pie, whether it’s through a settlement or a court order.

The 2011 law that required local governments outside Chicago to make actuarial based contributions to bring police and fire funds to a 90% funded ratio by 2040 included the intercept mechanism beginning in fiscal 2016 but did not address the potential for competing claims.

The comptroller put in place a diversion process earlier this year and the police fund was the first to submit a certified claim. The firefighters followed. While the comptroller’s review of the city’s protest concluded that the police fund was entitled to the withheld funds that it largely based on the fact that it was first to submit a claim.

The comptroller’s lawyers would also like direction going forward on how to proceed when her office receives competing claims.

The city is at risk of losing about $7.16 million revenues annually until the judgments are settled based on its share of “state funds” it received through transfers from the comptroller last year, according to Pallasch.

The conflict played out before Mitchell Tuesday as the police and firefighter funds bickered.

"I don't think this is at a point where it will be settled amicably," said Andrew Schwartz, of Schwartz & Kanyock LLC, who represents the firefighters' fund.

Judge Mitchell made clear his preference for a settlement, calling the current situation "somewhat regrettable."

The police fund argued against the TRO. The police fund was willing to give up about 80% of its claim to the withheld fund, Michael Moirano, of Moirano Gorman Kenny LLC, told the judge. "They wanted more and more,” he said of the firefighters’ fund, later saying his clients now “want the statute enforced.”

"What are the rules governing allocation?" Schwartz, the firefighters’ fund attorney countered. “We need a judge to decide.”

He argued the law’s intent is to aid public safety pension funds but not to help one and “wreck” the other by causing a “catastrophic problem.”

“Additional time just might help,” Fioretti said, saying the TRO might provide time for a cooling off period. “I’m still hopeful.”

The parties return to court for a preliminary injunction hearing May 31 in which the judge could continue to hold up the funds or free them up for distribution. Without a settlement, the city’s lawsuit charging that its revenues are being illegally diverted also would continue with a future hearing on the police fund’s motion to dismiss it. The firefighters had previously supported that motion.

“On that day, you were friends,” Mitchell quipped.

Market participants are watching closely to see how the Harvey case plays out as it raises short- and long-term questions. Rating agencies have warned a flood of other pension funds could follow the Harvey funds’ lead and there are several hundred that have been shorted by their government sponsors. The intercept also has sparked worries that bondholders’ legal claims will fall behind pensioners and could lead to impairment as distressed governments look for ways to preserve funding for critical services.

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