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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.

Disaster

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.

 

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Beau Merz

Did any welfare “caseworkers” get the gate?

S & P 500

I got into an argument with some union types on a blog regarding the Kentucky teachers strike. I mentioned rule GASB 68 and somebody said I’m just trolling and it’s irrelevant nonsense. Caramba. It’s hard to talk to people who don’t understand Accounting 101, such as what is a balance sheet and what are assets and liabilities.

http://www.wkyt.com/content/news/LEXINGTON-Ky-WKYT—-479501933.html

Erik

This is an incredibly sad situation for the residents of Harvey, who no doubt just want to live in dignity in a safe community. How many “Harveys” will it take to wake up the press and the state legislature? Decatur, Danville, Quincy, Rockford, Metropolis, and Cairo can’t be far behind. It’s long past time to demand that Illinois municipalities be allowed to take bankruptcy.

S and P 500

I was reading about the mess in Kentucky. The state has only 4.5 million people and $40 billion in unfunded pension liabilities. You would have to collect $10,000 from each person to pay off that debt. The Dems question Trump’s sanity, but who were the math-challenged idiots who rang up that much debt? When will people learn—(1) Unfunded pension liabilities are real debt and (2) the state cannot print money like the Federal Reserve.

patriot man

Fortunately for Kentucky residents there is no pension guarantee for public pensions in Kentucky. Only 7 states were dumb enough to do that:
Alaska, Arizona, Hawaii, Illinois, Louisiana, Michigan, and New York.

So the pensions for the public sector thieves in Kentucky can be diminished.

Tough Love

Harvey needs to go into Bankruptcy AND disavow 75+% of it’s pensions ALL of it’s retiree heathcare obligations.

Insatiable Public Sector Union/Worker GREED has consequences.

Nick T.

Detroit by the Little Calumet. This story will get to the end much faster, there is not much wiggle room left. The people of Harvey don’t seem to have any friends in high places. Best Wishes, Harvey, IL.

Rick

The first thing they need to do is to field a good old fashioned all volunteer fire department. Kick out the fire dept union. What if someone needs an EMT?

Kherrell58

Our Illinois town has a volunteer fire dept and volunteer ambulance
With one paid EMT. Have loads of money! No union!

GEo

Wait so you’re blaming the union?? The mayor has been caught with his hand in the cookie jar multiple times. Buying himself a $50k SUV, payments to family members, stealing money under a fake redevelopment scheme and being fined by USTSC for it, allowing his aide to take $800,000 of that borrowed money, and on and on and on. But it’s the unions fault? The union who has a contract agreed to and signed by the city? That’s genius logic right there.

The people would never have signed any agreement with the union. It’s all the union greed that is leading to the awful situation Harvey is in now. Maybe you will be one of the lucky ones to be laid off permanently. How about pensioners get what their pension is funded at, what’s that, maybe 20 percent. Sounds okay being no money is left.

Mark M

I highly doubt Harvey has enough social capital to sustain a volunteer fire department. This sounds harsh, but to make these things work community cohesion, a sense of true volunteersism and a population which can devote energy to more than just survival is required.

Advocate

The reality is the law and the Courts are very clear and consistent about paying the pension bill. It is a very poor fiscal strategy the city endeavored not to fund a pension fund for over 10 years. Where did they think that would get them? We Cannot encourage more towns from doing the same as Harvey, for whatever reasons. Bad fiscal management should not be rescued with easy bankruptcy. Those that argue for easy municipal bankruptcy encourage irresponsible fiscal policy(like Harvey) and encourage risk over prudence. A safety net of municipal Bankruptcy would allow and encourage fiscal risk for… Read more »

nixit

Agree, Harvey has some of the worst municipal management this side of the Cal Sag. But while they were skipping pension payments, were they still handing out raises to those same workers? Because if Harvey couldn’t afford the constitutionally protected pensions, they shouldn’t have used pension money to fund raises.

What Harvey could do is keep everyone but do an across-the-board 20% pay cut and freeze, then take that “savings” and deposit it into the pension fund. This would save everyone’s job and follow the law. When Harvey has caught up on payments, then they can resume raises.

You foolishly think the unions will go for that don’t you. That 20 percent cut wouldn’t do anything to alleviate the situation at hand. The police and FF personnel are making 4 times what the citizens that they serve are. And then comes the golden parachute, 25 more years of payments. It is simply a Ponzi scheme in the making and now is coming to a head as it unravels very quickly. No more money is left.

Advocate

I know Harvey policemen personally worked with them for decades. Can you even imagine what it would be like to work as a policeman in the super dangerous tough streets of Harvey? everyday of your working years? Under tier 2 pensions now Cops have to work till age 67. No new reform required to reign in pension abuse. 401’s would be a upgrade, but cost taxpayers more, while granting portability for union members. Harvey cops make a policeman’s salary far lower than neighbouring suburbs, while risking life and limb in a dangerous hood. Tough ass job. Then stick it out,… Read more »

Adam

You are delusional at the very least, but I suspect more than just that. Harvey is toast and so is your pension. Avoiding new taxes on a total dump with insane property taxes already? Talk about math clueless.Taxes cannot and will not go up forever. Harvey is tapped out and soon will go bankrupt, which in turn will open the door for every other town and city in this state to also go bankrupt. I cannot wait! I honestly loved seeing the public workers get laid off, but I will love it even more when the pensions collapse.

On the contrary. Having bankruptcy available as an option puts discipline in the system by telling the muni bond community that they can’t lend impossible amounts to a borrower. Pensioners, too, are made to understand that broke governments can’t print money. The government’s obligation to pay debts ends where the obligation to provide basic services begins. That’s the concept behind municipal bankruptcy. I predict that, eventually, we will have a federal court ruling to that effect even without bankruptcy, though that’s a long way off.

Rick

Harvey has no bond market option. No more room to tax option. No constitutional option to reduce their obligation. No ability to outright default option as they are now garnished. No cash flow option. No sellable asset option as the town is a wreck. What’s left to do? Bankruptcy. The problem is who will run that process? Knowing Illinois they will call it a bankruptcy, but in reality they will simply look for some higher level of government for a bail out and continue along as always.

Advocate

Sounds like the police power argument, brushed up, polished up with a new coat of paint; yet soundly rejected by the court and defeated in the sb1 case. Looking forward to something else I hope.

Yes, it is the police power argument rejected by the IL court (a political court). Count on it coming to a real court eventually — a federal court. Stay tuned.

Advocate

I knew it…Police Power was dealt with succinctly in the Sb1 Courts opinion. Bring police power back…and brush it off. But Sadly, there ya go again Mark, attacking the Illinois Court as not being a “real” Court. If its not a REAL Court according to you then it must be a FAKE court. Logic Dictates that what is not real is conversely fake. We have come to a place Nationally where we claim fake news, to deflect or discredit on the substance. You have transferred that same FAKE CONSPIRATORIAL notion towards attacking the legitimacy of Illinois Courts. You are in… Read more »

Kvetch 22

Real courts are impartial arbiters. Courts such as the IL elected supreme court have an economic interest in their own rulings about public pensions. One could make a similar argument about federal bankruptcy courts who also accrue pensions while sitting on the bench. However, those are federal pensions and the federal government can print money to pay those pensions. The federal government can also pay the army to enforce its court orders. One hopes it doesn’t come to that, but if anarchy is to be avoided, some court without a direct stake in its own rulings has to make a… Read more »

Advocate

What a strained argument that because a judge, might possibly someday, collect a pension, and that judge rules on pension law, it renders the Court Fake. A Federal judges pays taxes but can rule on tax law. A Fereral Judge gets SS, but can rule on SS law. A Federal Judges Child can get drafted into the Army, but can rule on conscription. Your understanding of Judicial Conflicts is that of a layman. Under your twisted logic- a Illinois taxpayer has an economic interest in pension ruling outcomes. So therefore ANY taxpayer could not rule on or judge pension law… Read more »

Kvetch 22

There is something called the Rule of Necessity that allows a judge or a court to hear a case when there is no other judge or court to do so. The rule is invoked when our constitutional structure does not provide an alternative forum. That Rule may or may not have applied in the Illinois pension cases. Generally, an appellate court takes note of its implicit conflict and makes a finding. I don’t recall whether any of the cases here touched that base, but I don’t think so. “Fake courts” is your own extrapolation from what are otherwise reasoned observations… Read more »

Here’s one possibility that may play later, though it hasn’t been discussed: The Guaranty Clause of US Constitution. Long dormant, but it says the US must guaranty a “Republican” form of government at the state level. Never mind what “Republican” means for now, it clearly means “a government,” and when basic services start ending, the clause may get new life.

judges get pensions too.That’s the problem

Rex the Wonder Dog!

“A safety net of municipal Bankruptcy would allow and encourage fiscal risk for Municipality High Wire Actions, Why not take high Fiscal risk, if easy bankruptcy provides a soft landing, or provides a easy do over? Right?” In real life this just does not happen, no one does this except when they’re in Las Vegas gambling with other peoples money. If the elected official/s did this, or try to do this, you simply vote them out of office. The fact is he money is not there. And take this to the BANK, taxpayers at age 67 getting a pension 1/10th… Read more »

patriot man

Do you think decent hard working people give a furry kitten about what happens to these over compensated police, fire fighters, and municipal workers? I view every last one of you coc_suckers as a parasite. As a taxpayer, i do not want IL saved, I don’t care if my home value goes to zero, what I do not want is these bloated so called public servants collecting me one – ever. A scorched earth policy for me. Do you parasites have any idea how literally hated you are? Every day I scan the obituaries hoping to see one of you… Read more »

Adam

Mark,

I actually think this is a really good thing as far as Harvey starting to collapse. Don’t you agree? Harvey is going to force bankruptcy allowance much sooner than later for all cities in towns in Illinois that need it.The public unions not only are going to start losing workers in massive layoffs due to their own bloated pensions, but in the end, their pensions still are going to collapse and be lowered. Math and reality are unstoppable.

I suppose the good thing is that this may indeed spark the needed debate. But the cost to residents is horrific. Their home values have been destroyed. Shame on Illinois for letting it get to this point. Decisive action should have been taken fifteen years ago when the numbers were clear that a disaster was coming.

Adam

I agree. However, most of our politicians in this state are bought and paid for by the corrupt public unions, so of course they will let it crash and burn before they are forced by math and reality to do anything. They will be forced to soon.

Jake Braekes

I was in Harvey yesterday. There is NO economic base to tax. Its main street, 154th St., is deserted of retail and service businesses. The homes are old and many need repair, and yet they are taxed at 5%. Harvey will end up more deserted than it already is. For those who want to see the future of their city or village, take a drive. For those who want to see the future of Ilinois, take a drive. Pensions will break the state, and with that, will come an end to public union pensions and those who thought they would… Read more »

Yes, went through Harvey last year getting to Ravisloe golf course. Talk about an eye opener. The whole area is depressing and then this beautiful golf course in the middle of a wasteland

It’s truly a humanitarian tragedy for all of south Cook County. We laid out the numbers two years ago here. Most of the press has ignored it. Should have been a national story. Still should be. Very frustrating. https://wirepoints.org/suicidal-property-tax-rates-and-the-collapse-of-chicagos-south-suburbs-wp-original/

Doug

The State Democrat Machine is going down the “Scorched Earth Path!” It will only be a complete “Death Spiral” as long as voters keep electing the same old corrupt politicians.

“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.”

Jake Braekes

Because those who work for government at all levels in Illinois is very high, the voters will keep electing the same corrupt politicians, because those pols are making sure Uncle Mikey gets his pension. Voters can’t add. Those who can leave the state.

patriot man

The city actually had a great deal off control. They could hire contractors, they could have paid out non pensionable one time bonuses in lieu of raises, they could have went to a volunteer fire dept model like many communities, policing numbers could have been reduces via contractors and security firms who patrol but do not engage and serve as bird dogs for the regular police. All supervisor functions are ripe for contracting. Most city functions can be outsourced, certainly all clerical and maintenance.

David Pals

Let’s have a round of applause for Public Sector Unions!

Paul

It seems it is the most important entity in Illinois.