By: Mark Glennon*

The fiscal crisis in Harvey, Illinois may be exceptional, thanks to its particularly acute history of graft, mismanagement and economic problems, but rest assured it’s being closely watched by everybody interested in Illinois’ struggling municipalities — not just residents but pensioners and bondholders in particular.

Money flowing from the state to Illinois towns and cities is critical for most of them. Harvey last month became the first Illinois municipality to face “intercept” of that money to fund pensions. The law provides that any municipal pension that doesn’t get its required annual contribution from the municipality that sponsors it may request the state comptroller to seize any state money due to the municipality and deposit it into the shorted pension.

The consequences for residents and bondholders are potentially devastating for some communities. Harvey responded by laying off about half its public safety employees.

Harvey went to court to try to halt the intercept and a free-for-all fight for the money ensued between bondholders, the city, its police pension and its firefighter pension.

Comptroller Susana Mendoza delivered to the litigants a key letter last week that her office provided to us, linked here, outlining her position and her intention to complete a $2.3 million intercept. It’s important for two reasons.

First, the comptroller exempted a bit of the disputed money from the intercept — $279,000 of home rule municipal sales taxes that are specifically to be used for holders city hotel-motel revenue bonds.

Second, and more importantly, she directed the intercept in favor of the pension that was first to make its request, which was the police pension. The firefighter pension had made its intercept request second. While the priority issue was not discussed in the letter, implicitly that means the first intercept request wins.

However, the court immediately blocked distribution of the funds. A further hearing is scheduled for this Monday, the the primary issue apparently being the battle between the two pension funds.

Legally, it appears that the comptroller had it right. Taxes destined for revenue bonds aren’t state money subject to the intercept. Instead, they are dedicated from the outset to debt service on a specific project. (They are usually held in trust for that purpose, though I have not seen the documentation for the Harvey project.)

It also appears correct that the first pension to ask gets the state money. The comptroller has no discretion and is bound to administer the law. As the statute (40 ILCS 5/3-125) is written, it appears the pension that first properly certifies its request should indeed prevail.

We’ll have to wait to see if the court agrees that first-to-ask-wins, but if that becomes the rule going forward, trustees of pensions that can demand an intercept will face increasing pressure to do so. They have a fiduciary duty to look out for the pension, not bondholders, taxpayers or residents.

And there are lots of pension trustees facing that issue. A Wirepoints Special Report found about 200 municipalities that could face a pension intercept based on inadequate funding for 2016, which is the most recent data we have and the earliest year subject to the intercept law.

That’s why Moody’s today issued a statement saying Harvey developments are “credit negative” for all Illinois municipalities. “The comptroller’s response has important implications for other municipalities in the State of Illinois struggling to provide services and pay pensions because it clearly prioritizes underfunded pensions over municipal services,” said Moody’s. Their statement is discussed in a Bond Buyer article today linked here.

So much for the battle between pensions and bondholders. What about taxpayers and residents needing services?

The city has been trying to negotiate some kind of broad settlement that would preserve at least some of the funding for itself, but I’ve seen nothing reported that, legally, it can stand on. The law is the law. As we’ve been saying repeatedly, this is an inevitable fight over the bones between pensions and bondholders. They’re who Springfield wrote the law to protect, and they’re the only ones playing the hardball game of insolvency smartly. Taxpayers and service recipients be damned.

It’s happening, as we like to say. Harvey is only the first.

UPDATE 5/31/18 The next court hearing, that was scheduled for today, was postponed to Monday in light of ongoing settlement efforts.

*Mark Glennon is founder and executive editor of Wirepoints. Opinions expressed are his own.

 

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Freddy
1 year ago

Mark- Who will ultimately pay for all the lawyers and court costs? Is it the unions-the pensioners-the local municipalities or the taxpayers who thru property and other taxes already pay for their legal counsel . Seems like taxpayers will be on the hook for unfunded pensions and armies of attorney’s.

Mike xyz
1 year ago

Would also be interested in reading the Harvey Police Pension Fund Statement of Notification that was submitted to the Illinois Comptroller.

Depending on how this plays out in the dash for cash, one possibility is some participants in some local police and fire pension funds suing the pension fund board for not, or not quickly enough, filing a Statement of Notification with the Illinois Comptroller to intercept state funds?

jaherzrent
1 year ago

is the intercept statute an impairment of the bondholders’ contract? Or are the bondholders’ contract rights limited to their annual right(s) to get principal and interest payments? If that’s the case, why aren’t pensioners’ rights limited to the right(s) to get benefits due during the intercept interval? True or false: the contract rights belong to the pensioners and those are rights to receive monthly payments when due. Does the pension trust also have a contract right to get some contribution as determined by a pension board based on the advice of an actuary? The expectation of an actuarially sufficient contribution… Read more »

Douglas
1 year ago
Reply to  jaherzrent

Good questions jaherzrent, this is going to one big mess. Until official bankruptcy proceedings, things will get worse and worse and more and more people will be impacted.

Bob
1 year ago
Reply to  Douglas

Looks like some serious aggrandizement here!

jaherzrent
1 year ago
Reply to  Bob

By or for whom?

Bob
1 year ago
Reply to  jaherzrent

self aggrandizement I should have said

jaherzrent
1 year ago
Reply to  Bob

Only if I were licensed or qualified to practice bankruptcy law in Illinois, which I’m not. Nor am I an Illinois pubic employee, retiree or taxpayer. If you are any of the above, other than a lawyer, you are destined to pay for the mess created by the self-aggrandizing politicians and unions. If your lease is up soon, you’re one of the happy few who might be able to run for the border.

Bob
1 year ago
Reply to  jaherzrent

Admit it, you had to look the word up and answer much too fast. Computer lock! I was driving through Centralia two years ago and the was a junker parked in a lot with “Link Cards 4 Sale” painted on the side. Over my wife’s objections (she thinks I am going to get knifed) I wheeled in and ask what was up. 59 cents on the dollar with PIN he said. I ask if he was not afraid of getting caught and he looked at me like “you stupid *#$%”. – nobody gets caught. If the argument is Illinois can’t… Read more »

Mike xyz
1 year ago
Reply to  Bob

So is the school district from which you retired in Clinton, Jefferson, Marion, or Washington county?

Bob
1 year ago
Reply to  Mike xyz

Yes

Kvetch 22
1 year ago
Reply to  Bob

Janitor or bus driver?…

Bob
1 year ago
Reply to  Kvetch 22

I could do it all! I taught Government,Civics, Geography, American History, World History, Yearbook, and coached golf. We were at a match in Vienna and I had met a new coach in a triangular meet. We stopped at McDonald after and just as I was getting ready to pay the other coach that I had met yelled “nice to meet you coach”. I replied “I am not the coach, just the bus driver”. The cashier said “bus driver? They eat fro free and handed me back my $10” After that I was not coach but bus driver and I was… Read more »

Mike xyz
1 year ago
Reply to  Bob

From an elementary, high school, or unit district?

Bob
1 year ago
Reply to  Mike xyz

Unit, but a small Unit. When the Unit was formed the State told the people “form a Unit and you will never have to worry about $”. As Dr. Evil used to say – right —————————————–. Although I taught high school, I also had an elementary cert and later an administrative which I never used.

By the way I enjoy the banter with all. Nothing personal. Our problems are not caused by people arguing too much, just too little.

What area of Illinois do you call home?

Mike xyz
1 year ago
Reply to  Bob

What year was the reorganization?

I’m in NE IL.

What’s your thoughts about substitute teaching to supplement your income?

Bob
1 year ago
Reply to  Mike xyz

I had a longer reply here but just as I hit the “Post Comment” a storm hit north of here, knocked the ISP out, and it sailed off to who knows where.Could be divine intervention. I know some are thankful for that. From NE Illinois? Then you are already a member of the club. That is the Springfield/Chicago does not know we exist club. I think the combination of several districts happened mid 50s into anew Unit. Again the promise was $ forever. It just shows that “gentleman’s agreements require gentlemen. I sub taught for awhile after I retired but… Read more »

Mike xyz
1 year ago
Reply to  Bob

To whom did you write in Springfield?

Sounds like plan B has worked ok for you.

What year did you start teaching?

Bob
1 year ago
Reply to  Mike xyz

I of course wrote my local Springfield reps. It was often a strange conversation as the people who caused this mess were often long gone or not of this part of the state. I often found myself preaching to the choir. I felt that had the question been solely in their laps it would have been handled much better. Whenever a member of the Senate or House became a pension reform person and showed on TV they were open to contact. I could usually find an email address somewhere. I think they agreed with the idea they were now open… Read more »

Mike XYZ
1 year ago
Reply to  Bob

You retired around 2010 then with 35 years of service?

Just talk to people, read, pay attention.

Are you a member of IEA Retired?

Mike XYZ
1 year ago
Reply to  Mike XYZ

btw I just remembered you retired about 10 years ago.

Bob
1 year ago
Reply to  Mike XYZ

No. I am not a member of the local here either. I am however on both the mailing lists somehow. Good info and good alerts. Not sure why I didn’t join either after I retired. I write several papers here often trying to keep them honest. They seldom understand the history etc. of the pension mess. I have acquired quite a following of those who would like to pat me on the back, or take a swing. I felt that was the best way to pursue my beliefs and didn’t want to feel constrained by worrying about what others might… Read more »

Mike xyz
1 year ago
Reply to  Bob

TRS was not deducted by the district for substitute teaching before or after June 30, 1990? What kind of Forestry and Conservation? Federal, State, & Local? Trail development, land acquisition, improving facilities, restoration after forest fires, controlled burns, invasive species, wetlands preservation, etc.? Have you looked into how protected such land assets are in the event Congress, a state legislature, or local unit of government attempted to sell such land, or a lawsuit was filed to sell such land, to fund government debt obligations? For example changes to Federal and state constitutions, Federal and state law, local policy and ordinances,… Read more »

Bob
1 year ago
Reply to  Mike xyz

It was deducted prior to 1990 but was sent to Social Security. After 1990 it went to TRS. Why it ever went to Social Security, nobody can give me an answer.

I have studied both Mark Twain Forest and Missouri Dept. of Conservatism. The Forest Lookout Tower’s have been my main interest.

I will have a book out on my 50 years of travels next year. The focus is mostly the changes, mostly positive, from the situation 100 years ago. Lots of old pictures.

Mike xyz
1 year ago
Reply to  Bob

What was your experience in advocating your positions to the IEA local?

Did you ever run for or were elected to a position in the IEA local or to be a delegate to the IEA RA?

Ever a member of the collective bargaining team?

The lookout towers have an interesting history and their preservation appreciated; it’s nice to have a scenic view.

Bob
1 year ago
Reply to  Mike xyz

Try tinyurl.com/mofiretowers for a Google Map thing my wife and I have contributed to for years. Lots of info there. I found the usefulness of the IEA local was directly proportional to the quality of the people there at the time. As I said, unions are not perfect. I always wanted to hang together however. I was local Pres one year. The coal prep plant was removed from the tax base and we lost $300,000 in the summer. Not a good year to negotiate. hard to play strip poker with no clothing on! The local had more power when the… Read more »

NB-Chicago
1 year ago
Reply to  Mark Glennon

yes, a giant lawyers bonanza for lawyers from the bond holders and pensioners but I’m sure no legal help for the bankrupt municipalities and folks losing there homes-they’re (we’re) screwed. questions, where would the pensioners (public sector unions) get the funds to fight such battles?

Mike xyz
1 year ago
Reply to  NB-Chicago

“In 2017, Illinois had 317,000 state and local government union members and would, with a Janus win, lose over a few years 49,000 members, the study estimated.” “Janus pays about $47 each month to the union compared to member dues of $60, according to AFSCME Council 31 spokesman Anders Lindall.” https://chicago.suntimes.com/news/public-sector-unions-supreme-court-decision-illinois-mark-janus-case-rauner Play with the numbers. For instance, lowball, 317,000 members x $47 per month x 12 months = $178M annual revenue. That does not include PAC contributions, doesn’t factor in retirees, does not account that some unions have higher dues (some may have lower), does not account for part time… Read more »

jaherzrent
1 year ago
Reply to  Mike xyz

Detroit “adjusted’ $18 billion in debt for $178 million in legal fees. (Reuters) State and local governments in Illinois owe more than $203 billion for pensions and retiree health insurance. When you consider that Detroit was only one debtor and Illinois state and local governments probably number in the hundreds, you have to anticipate attorneys’ fees at many times those faced by Detroit. You should also recognize that those fees will either deplete the pension funds’ assets or government assets that could be used to fund pensions. There is no infinite pot of money to pay these lawyers and the… Read more »

Douglas
1 year ago
Reply to  jaherzrent

Interesting recommendation Jaherzrent, very reasonable compromise. The forgotten man pensioner has no representation in this fight, only the pension millionaires, bondholders, and labor union bosses. The problem is the longer this gets dragged on, the smaller the pot, and the more damage done to taxpayers and local economy.

NB-Chicago
1 year ago
Reply to  Douglas

so set me straight, if there are 600+ separate fire/ police pensions in state is for example, and say for example, the particular police pension fund that’s hiring lawyers to fight for there priority of tax intercept Harvey $, then dose that pension funds source to pay legal fees only come from that one pension funds union dues? or is there some collaboration state wide, or nationally? or, when k. raoul gets in as ag (in place of do nothing l. madigan) he’ll be the greatest friend to the public sector mob and the unions wount have to spend a… Read more »