By: Ted Dabrowski and John Klingner
It’s happening. We’ve written about this before. It’s not one big blowup like the subprime crisis, but it is happening, and Harvey is part of it.
Few places make the case for municipal bankruptcy in Illinois better than the city of Harvey. The city has reached such a state of dysfunction that both the state and the courts have stepped in.
Harvey has just announced that it’s firing nearly half of its public safety employees because the city can’t afford to pay both its employees and its bills at the same time – the result of a law that lets the state confiscate Harvey tax revenues if the city skips its pension payments.
The depth of the city’s financial crisis is beyond severe. The city failed to contribute money into pensions for years. The funding levels of both its public safety funds have collapsed. The city’s finances have been under multiple investigations. And basic services are being entirely neglected.
It’s gotten so bad that higher authorities have stepped in. The courts last year ordered nearly-bankrupt Harvey to hike its sky-high property taxes – even though they are already at confiscatory levels – to pay for public safety pensions. Now the comptroller is confiscating the city’s local tax revenues to pay for those pensions.
One or both of those actions may accelerate what needs to happen in Harvey: bankruptcy.
The situation in Harvey is complex, to say the least. Corruption and endemic mismanagement make it hard to know what exactly is going on. But nothing can hide the fact that Harvey suffers from a virulent form of bad math that’s affecting other communities across Illinois.
At the heart of Harvey’s problem is its pensions. The police fund has just half of what it needs. Fire is just 22 percent funded. Pensions went underfunded for nearly a decade. And there are fewer active workers in the police and fire funds than there are beneficiaries.
Add to the fact the city is poor (37.9 percent poverty, 2016), has high unemployment (20.7 percent, 2016), exceedingly high residential property tax rates (5 percent-plus) and a disappearing tax base, and you have a recipe for disaster.
Unfortunately, the fixes the state has come up with won’t help the city or its pension funds.
First, there was the court order that required the city to hike its property taxes specifically for its firefighter pensions.
Effective property taxes for residents of Harvey are already at 5 percent. Property values have dropped by nearly a third since 2009, while tax bills have jumped more than 40 percent. Higher taxes will only worsen the death spiral Harvey is in, shrinking its tax base further.
Wirepoints’ commentary from last year summed things up: “…we have a court now ordering blood out of a turnip. Harvey is broke and property in Harvey is already obscenely overtaxed. But it’s the very fact that Harvey is a bloodless turnip that helps make it subject to court-ordered tax. Because they can’t pay, they have to pay, according to the court’s thinking.”
Now the state has come in and made things even more complicated. As a result of the relatively new pension funding law, the comptroller has garnished $1.5 million of Harvey’s local tax revenues, with the intention of handing them over to the city’s pension funds.
Several thoughts on that. One, it’s rather rich for the state of Illinois to take another government’s revenues in the name of pensions considering its own $250 billion mess. Not to mention the fact that the state mandates the pension benefits that must be paid and the collective bargaining laws that must be followed by municipalities.
Second, this is yet another instance of the state prioritizing pensions over city services for the disadvantaged. By garnishing city revenues, the legislature is protecting public sector pensions over social services and health care. In fact, if the city is incapable of caring for its most vulnerable, that itself may make the case for bankruptcy.
Third, the state’s action is supposed to help protect the city’s police and fire workers. Well, it might help some, but it just got a whole bunch of others fired.
Bankruptcy is a necessity
All that’s not to excuse Harvey’s failures. The city is a bankrupt, mismanaged mess.
However, everyone seems to realize that but the state. Illinois legislators won’t let Harvey reform pensions, cut labor costs, or declare bankruptcy. The state controls all of that.
The only good news out of this episode is that it might help turn the last item on that list, municipal bankruptcy, into reality.
Everybody needs it: the homeowners who are being overtaxed and seeing their home equity stripped, the struggling residents who can’t access core government services, and the public workers who have seen their retirement security disintegrate.
It may seem paradoxical, but bankruptcy and major pension reforms are what’s needed if Illinoisans are to show they really care about those who risk their lives to protect our communities.
It’s happening. Harvey is just bringing it to life.