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In August, we wrote here about an unprecedented appellate court decision affirming an order to an Illinois city to approve a property tax increase specifically for its firefighters’ pension. That city, Harvey, already has effective tax rates of 5.7% for residential and 14.3% for commercial properties.

Yesterday, Moody’s weighed in highlighting the implications for bonds. The full report, however, is for subscribers only. Among their comments:

The increased Harvey levy could make it politically and practically difficult for Harvey to
raise taxes any further to support government services and pay bondholders. The city has continually defaulted on its general obligation (GO) debt, though bondholders have not taken legal action that we are aware of and unpaid debt was not part of the court case. The city’s petition for a rehearing was denied by the appellate court in January. Harvey can appeal to the state Supreme Court.

In other words, respecting unsecured general obligation bonds, pensions can squeeze out capacity to pay the bonds. However, the appellate court decision turned on its finding that Harvey’s firefighter pension was “on the verge of default or imminent bankruptcy.” We don’t know exactly what that means, so we don’t know when, for any particular town or city, courts will start ordering tax increases for pensions and when that risk to their bonds would materialize. For a fuller discussion, see our earlier article.

Moody’s is certainly right to flag this issue for bondholders. They’re the only rating agency with some integrity when it comes to identifying the risks in our pension crisis.

But the whole situation is just plain wacko, and not just for bondholders. It provides yet another reason why the constitutional pension protection clause must be deleted. The court ordered 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 makes it subject to court-ordered tax. Because they can’t pay, they have to pay, according to the court’s thinking.

If that means no money for bonds, so be it. If that means property taxes go up even though they’re already far beyond confiscatory, so be it. Welcome to Illinois.

Mark Glennon is founder of Wirepoints. Opinions expressed are his own.

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Fred

Mark- Who will be ultimately be held responsible for Harvey’s mismanagement and misappropriation of taxpayers money? The taxpayers of course! I don’t understand how the courts could hold taxpayers liable when if fact when they paid their property taxes pension costs are in and within the property tax bills. A copy of your check is your receipt of property tax payment in full. Municipalities do not allow partial payment of tax bills and if you do your payment will come back. I see that as municipal Theft by Deception!

S and P 500

On the flip side, judges in some other pension cases may feel compelled to rule for pension reform. They know that pension reform means more money for the court system. Jerry Brown seems confident that pensions will be cut.

HJNolan

If you told the whole story, it would be one of corruption, undocumented spending, and over $10 million in bond money disappearing. And the politicians of Harvey canceling a pension tax. Failure to make any form of pension payments $0, nothing, even though pension payments were itemized in the budget. Additional bonding is not on Harvey’s horizon. No reputable bonding agency is willing to take the chance. It would have been nice to include Harvey’s miserable bond rating. It’s not a matter of the poor city, it’s a matter of not meeting a fiduciary responsibility while raping the treasury for… Read more »

NB-Chicago

once again, if the state bailed out cps/ctu pensions and chi home owners then if i was a harvey home owner or pol, i’d be going to the state and demanding an equal state pension bailout deal? along with all the other zillions of underwater munic pensions.

Fred

Mark- As I understand it if pensions can not be diminished or impaired that means they can’t be taxed under state rules but they are taxed under federal rules. Doesn’t federal taxes diminish or impair pensions. On that same note could the pensioners CONTRIBUTIONS be what can not be diminished or impaired (think principal in your bank account ) but lifetime returns on benefits could be impaired. Just trying to look at it from a different angle .Many people have around $100K in contributions but could collect over $1-2 million in benefits not including healthcare.