CHICAGO — The Harvey, Illinois, City Council will consider a settlement agreement with its public safety pension funds that would resolve a state diversion of funds the fiscally distressed Chicago suburb has warned threatens its ability to keep the lights on and meet payroll.
“The settlement saves Harvey from a de facto bankruptcy,” said Harvey’s lead attorney, Bob Fioretti of Roth Fioretti LLC. Parties to the settlement include holders of $6 million of revenue bonds secured by hotel-motel and sales taxes.
“It has been a long and hard road on negotiations," he said. "This could set a precedent in terms" of future settlements.
The council is holding a special meeting Thursday. If the divided council approves the “settlement in principle,” Illinois Comptroller Susana Mendoza’s office said it could move quickly to distribute to the city and the pension funds $649,000 that has been intercepted from various state-collected revenues. A previous agreement had freed up $2.3 million in funds last month as negotiations on a long-term settlement continued.
Like the previous agreement, the long-term settlement would allow the city to keep 65% of the pot of “state funds” that totaled $7.2 million last year while the police fund would receive 25% and the firefighters' fund 10%.
The city’s share of state sales taxes pledged to holders of $6 million of city issued revenue bonds will continue to flow directly to the trustee, Amalgamated Bank of Chicago, as laid out in the original bond ordinance. The trustee will likely remit much of the revenue to the city because home rule sales and other tax collections are expected to cover the roughly $650,000 of annual debt service.
The comptroller had recently concluded that “home rule” sales taxes don’t fall under the definition of “state funds” that can be diverted but the city’s share of the state sales tax does fall under the definition. Both were pledged to bondholders.
“The procedure in the ordinance will be followed and the bond ordinance will be enforced,” Brent Vincent of Bryan Cave Leighton Paisner, a lawyer representing the bond trustee, said in court. The bondholders had filed a third-party complaint seeking to limit the pension fund claims after the comptroller halted the monthly transfers of sales taxes to the bond trustee.
Harvey became the first municipality stung by a 2011 public safety pension law requiring that funds reach a 90% funded ratio by 2040. It included a revenue intercept mechanism to enforce compliance. The comptroller earlier this year put in place the process that allows police and firefighters’ funds to seek the diversion of state collected revenues to cover contribution shortfalls.
The police pension fund — at 51% funded — was the first to submit a $7 million claim based on a court judgment and the firefighters' fund — at 22% funded — followed with a $12 million judgment. The city initially challenged the diversion but the comptroller’s office concluded that the funds had met the legal requirements to move forward with the diversions.
In the spring, Harvey sought court intervention to free up the original $2.3 million.
Cook County Circuit Court Judge Raymond Mitchell eventually granted a temporary restraining order blocking distribution of the funds and the parties agreed to shared distribution on the $2.3 million pot last month.
The June release allowed the city to meet payroll and pay for critical services like garbage pickup. It’s unclear whether or how many public safety workers laid off over the spring when the diversion of funds first became public will be rehired.
Negotiations continued on a long-term settlement over the last month but were complicated by several issues including how future changes in the 2011 law might impact the settlement.
The final deal ensures that the agreement “is irrevocable and will be followed and enforced” under any circumstance including a change in law or in city leadership, said Andrew Schwartz, of Schwartz & Kanyock LLC, who represents the firefighters' fund.
Several lawmakers are pressing for changes in the law that could put off enforcement or limit the diversion levels. The Illinois Department of Revenue has agreed to abide by terms of the settlement that would allow for the flow of revenues to sidestep any change in law so that the settlement could be honored.
The settlement will also require that the city remain current on any contributions owed to the Illinois Municipal Retirement Fund — a well-funded statewide system that covers general municipal employees outside Chicago and Cook County government. That protects against the impairment of the revenue bondholders’ claim to the state sales taxes which otherwise would be subject to intercept if the IMRF filed a claim against Harvey.
The IMRF has long had the ability to divert a single state collected revenue source and currently does so for a handful of municipalities. The comptroller’s office has concluded that the IMRF falls under the 2011 law and now must go through the same procedure. It will compete with public safety funds for diversions, but the pot it can draw from is also now much larger.
The IMRF has filed four claims under the new procedure over the last month, according to comptroller spokesman Abdon Pallasch:
— One for $45,000 against the Harvey Library District with no funds yet diverted.
— One for $101,000 against the Ford Heights Public Library with $525.61 so far withheld.
— One for $35,000 against Centreville with $7,288.87 so far withheld.
— One for $36,000 against Centreville Township that is now satisfied.
Frustrations over the lack of a “signed agreement” nearly boiled over at the last court hearing Wednesday and Michael Moirano, of Moirano Gorman Kenny LLC, which represents the police fund, sought to move forward with arguments over whether the TRO preventing distributions should be lifted.
Judge Mitchell agreed and after a brief break to allow the lawyers to prepare their arguments, Harvey’s attorney returned to the courtroom with news that the council would consider the settlement Thursday. While the council is divided, Mayor Eric Kellogg has proved on past matters to be the deciding vote.
The next court hearing is scheduled for July 25. If the settlement is finalized, the case would likely be dismissed but questions loom large over how many of the more than 600 public safety pension funds might move intercept funds as reports have suggested hundreds are in the arrears.
The state’s lax oversight of local governments like Harvey — which has defaulted on some debt and faced regulatory enforcement on its 2008 bond issue — and stringent state constitutional protections against pension cuts leave local governments with few options, Nuveen wrote in recent report.
Harvey has a limited capacity to generate the amount of revenue needed given that in 2016 it had a composite tax rate for residential taxpayers of 24.2%, compared to 13.4% in southern Cook County and 7.1% in Chicago.
“Without the ability to adjust pension liabilities or transfer liabilities to the state, local municipalities can be left with no choice but to cut essential services and raise taxes. Both options have negative implications for residents and can accelerate a stressed municipality’s path to insolvency,” says the report authored by senior research analyst Molly Shellhorn.
Nuveen said it doesn’t expect a wave of fund intercepts are coming but it does see others facing similar struggles.
“Illinois taxpayers shoulder the fiscal burden of both state and local pension obligations; investors should evaluate the capacity of local tax bases to absorb growing pension costs when assessing credit quality across the state,” the report suggested.