CHICAGO – Even as Harvey, Illinois, won a court order to release funds the state withheld to cover overdue pension debts, a second city has joined the ranks of municipalities that could face such a maneuver to honor public safety pension obligations.

Harvey and North Chicago are the first to face enforcement under P.A. 96-1495. The cornerstone of the 2011 legislation was a requirement that local governments fund their public safety pension plans at a level to reach a 90% funded ratio by 2040. Most municipalities operate their own police and firefighter pension funds while those outside Chicago participate in a statewide fund for their general employees.

Under the legislation, “starting in FY 2016, pension funds became empowered to intercept state grants to municipalities in a gradually increasing amount such that by FY 2018, the entire amount of state grants to a municipality delinquent in its pension contributions may be intercepted by the pension fund,” according to the Commission on Governmental Forecasting and Accountability, or COGFA.

If a participating municipality fails to make its contributions based on an actuarially based calculation for more than 90 days after the due date, the fund may, after giving notice to the municipality, certify to the state comptroller the delinquent amount. The comptroller must deduct the certified amounts or a portion of those amounts from various state funds that flow to the municipality.

Prior state comptrollers did not implement a certification process, leaving it to Susana Mendoza, who took office midway through fiscal 2017. Harvey’s police fund was the first earlier this year to certify $7 million in overdue payments based on a prior court judgment.

Under the certification process, once a fund certifies a pension funding shortfall the onus falls on the local government to contest and show evidence to the contrary, said comptroller spokesman Abdon Pallasch. The comptroller holds on to the funds for a 90-day review.

Mendoza’s withholding so far of $1.4 million to honor a $7 million judgment Harvey owes its police fund prompted the impoverished city south of Chicago to slash its public safety staff. The move drew widespread public attention to the diversion mechanism and statewide pension ills.

An appellate court on Monday gave Harvey at a brief reprieve by granting a temporary restraining order that frees up the funds. It reversed a decision April 9 from Cook County Circuit Court Judge Raymond Mitchell, who rejected the TRO request made in the city’s April 5 lawsuit against the comptroller’s office.

The 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.

Illinois State Comptroller Susana Mendoza
Illinois Comptroller Susana Mendoza is carrying out a law empowering pension funds to intercept state grants to municipalities that aren't meeting funding requirements. Illinois Comptroller's Office

The appellate court granted the TRO without elaborating on the legal reasoning behind its reversal. “This case is remanded back to the circuit court for a preliminary injunction hearing at the earliest possible time,” the order says.

“When we receive a copy of the TRO we will comply with the order and release the funds,” Mendoza spokesman Abdon Pallasch said.

While the Harvey dispute will play out in the courts, some lawmakers and analysts are sounding alarms that more municipalities may soon follow given the poor funding levels of public safety pensions statewide.

The comptroller’s office already has a certified request from the Harvey firefighters fund seeking to divert funds to pay off an $11 million judgment. Harvey’s police fund was 51% funded and its firefighters at 22% in the last actuarial report for fiscal 2016.

In recent days, North Chicago’s firefighters fund has submitted a formal certification to collect on $863,000 owed to the fund. The comptroller has so far withheld a tiny fraction of that: $450, according to Pallasch.

North Chicago, in Lake County 33 miles north of Chicago, is carrying a police pension net pension liability of $67 million and a $30 million firefighters’ net liability. The city of 30,000 has $21 million of outstanding general obligation debt. It reported a $47 million net position deficit that measures liabilities against assets and $11 million unassigned fund balance in its last audited fiscal results.

S&P Global Ratings last affirmed North Chicago’s A rating and stable outlook in 2014 based on strong liquidity and reserves while negatives include a weak local economy and large pension burdens.

Moody’s noted in a report on how Harvey’s situation underscores the state’s stringent pension benefit protections that of the roughly 650 public safety plans in the state about 4% had funded ratios below 25%, “an indication that other plans may face similar challenges to Harvey.”

The unfunded liabilities of local government public safety funds outside Chicago nearly doubled over the last decade rising to $9.9 billion in fiscal 2016, according to a December report from COGFA on the status of the 653 police and firefighter funds. Combined, the funds were 57.58% funded.

Two reports this week looked at the number of local governments that have fallen short on required payments. About 11% of public safety funds received just half or less than half of what they were owed by 54 municipalities for fiscal 2016, according to a blog post by Amanda Kass, an assistant director at the University of Chicago Harris School of Public Policy’s Center on Municipal Finance.

More than 400 funds, or 63%, received less funding than what was required from their cities in 2016, according to an analysis posted at Wirepoints.com.

Some lawmakers say they may seek to amend the existing statute to provide flexibility on withholding to avoid the Harvey situation where public safety workers face layoffs while others have said the Harvey case – despite the city’s long history of fiscal mismanagement -- underscores the need for statewide action on pension funding changes.

State Rep. Jeanne Ives, R-Wheaton, who recently lost her bid against Gov. Bruce Rauner to run as the Republican in the November general election, said this week the state should add a Chapter 9 provision to state law.

Harvey may qualify for state intervention based on its taxation levels under an existing Fiscally Distressed City Law for home rule units that provides state intervention but local authorities would have to vote to seek the help and subject themselves to oversight. The Chicago Civic Federation is lobbying for a new program that would allow for early intervention.

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