View data PDF: Police and fire contributions by locality, 2016
By: Mark Glennon*
Moody’s Investor Service today released a report saying last week’s Illinois Supreme Court ruling against City of Harvey demonstrates bondholder risk from pension underfunding, and that the ruling is “credit negative” for Harvey.
Some background: That ruling last Thursday vacated an appellate court ruling that would have provided Harvey relief from pension contribution requirements. The Illinois Comptroller, as we detailed earlier, had intercepted some of the money that flows to Harvey from the state. That money is critical for many municipalities. A law that went into effect in 2016 allows for that money to be diverted to pensions for municipalities that fail to contribute adequately to them.
A Wirepoints Special Report found almost 400 other Illinois pension funds that potentially could trigger a similar intercept of their municipalities’ state money.
According to Moody’s: “The court’s decision demonstrates that municipal pensions are ‘must-pay’ obligations in the State of Illinois, and have greater protection against default than a city’s general obligation bonds.”
Court proceedings actually are not over. The Illinois Supreme Court’s ruling merely denied immediate relief and sent the case back to a lower court for what will be a fuller hearing on a possible injunction to halt the intercept. As reported by the Chicago Tribune, that likely won’t get underway until later this month. “Given that the issue is presently before the court and there is no past precedent as to how a judge might rule, it remains unclear what the comptroller will do if the case has not been resolved via court order or settlement by the time May 21 rolls around.”
This is one skirmish in the broader, three-way battle coming between pensions, bondholders and residents. In this case, it’s a fight over bones. Harvey’s effective residential tax rate was already 5.7% even before last year’s court-ordered property tax increase specifically to fund a different city pension. Harvey’s plight is exceptionally bad, but you can count on the same three-way battle playing out in dozens of troubled municipalities across Illinois.
One place where the battle is evident is Senate Bill 370 pending in the General Assembly. An amendment recently added would limit the Comptroller’s intercept power, starting in FY2019, to one-fourth of the total amount of state funds for any municipality.
*Mark Glennon is founder and executive editor of Wirepoints.