Fiscal Fire in the Hole

April 24, 2018

Good Morning! In this morning’s eBlog, we return to the Windy City region and the small Chicago suburb of Harvey, as it teeters on the edge of insolvency in a state where municipalities are not authorized to file for chapter 9 municipal bankruptcy, albeit under Illinois’ Local Government Financial Planning and Supervision Act (see 50 Ill. Comp. Stat. 320), a local Illinois government with a population under 25,000 suffering from a “fiscal emergency” may—if it secures a two-thirds vote of its Council, petition the Governor to appoint a financial planning and supervision commission to recommend that the local government be granted the authority to file for chapter 9 via submission to the Illinois Legislature—something which happened twenty-nine years ago in the case of East St. Louis.

Fire in the Hole. Illinois Rep. Jeanne Ives (R-Ill.), whose Chicago suburban district includes all or portions of Wheaton, Warrenville, West Chicago, Winfield, Carol Stream, Lisle, and Naperville—and who served on the Wheaton City Council prior to being elected to the Legislature, yesterday said the embattled, small municipality of Harvey was not alone in its inability to meet Illinois’ pension demand, adding the small city should strongly consider filing for municipal bankruptcy. In the wake, as we have noted, of the state’s withholding of funds to Harvey because of its non-payment into the pension system, firefighters and police officers have been laid off. That is, there is a growing human risk—and, as with fire, it is a risk which could spread to other municipalities in the region—from Burbank to Niles to Maywood, small cities in comparable fiscal straits. With boarded up businesses on the main street, it appears, as Rep. Ives notes, that “Bankruptcy is the only way out.”

In the wake of the State of Illinois’ decision to withhold state assistance because of its failure to make mandatory public pension contributions, the city laid off nearly one-third of its 67 firefighters and 12 of its 81 police officers. Harvey has not kept pace with pension payments for more than 10 years. With boarded up businesses on the municipality’s main street, Rep. Ives, ergo, notes: “Bankruptcy is the only way out.” Adding, in reference to the small city’s layoffs: “Forty-two retired Harvey firefighters have saved a collective $1.42 million, but have already collected nearly $25 million in retirement.” Her comments came in the wake of the Cook County Appellate Court overturning of a prior decision by the Cook County Circuit Court and grant of a temporary restraining order against the Illinois State Comptroller with regard to the hold of $1.4 million from the City of Harvey. The Mayor, Eric Kellogg, has released a statement noting: “We will not entertain any conversation concerning the filing of bankruptcy;” however, the municipality’s fiscal options are limited. Even though the Appellate Court of Cook County has overturned the prior decision of the Cook County Circuity Court and granted a temporary restraining order against the Illinois State Comptroller regarding the hold of $1.4 million from Harvey, the option of raising local taxes appears most unlikely—or, as one local taxpayer who used to own a restaurant there put it: “My property taxes were $80,000 a year: How many hot dogs can you sell?”

As our insightful colleagues at the Municipal Market Journal observe, Illinois’ statute, P.A. 96-1495, “potentially transforms pension funding problems into service funding issues and may accelerate fiscal deterioration of some municipalities. The law, which recently became effective, requires that the Illinois Comptroller to withhold and divert state revenues targeted for a municipality to police and fire pension plans when requested to do so by the funds, because of the failure of the sponsor to make required contributions. The Journal goes on to observe: “The City of North Chicago is the second, but according to a recently published paper by the University of Chicago’s Amanda Kass, there are over 600 individual police and fire pension funds in the state and 29% were less than 50% funded in 2016 (Chicago excluded). This suggests that, if the court upholds that the state must divert money away from municipalities that short their police and fire pensions, more governments may be thrust into fiscal distress.” Their note adds: “Because of a lack of readily available information, the paper uses the Illinois Department of Insurance’s calculations regarding what should have been contributed to the pensions during the period from 2003-2010 to determine the municipalities that are more likely to be at risk of a diversion. Fifty-four municipalities responsible for 71 funds contributed 50% or less of what the Illinois Department of Insurance said should be paid, and, as a result, the funds are worse off with a 47% funded ratio in 2016 compared with a state average (again, excluding Chicago) of 60%. Notably, over 50% are in Cook County. The Department of Insurance (DOI) is one of three sources that can determine the contribution (an actuary hired by the fund or by the municipality can also make the determination).