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.