By: Mark Glennon*
Although the amounts are small for now, Chicago has joined the list of Illinois municipalities having state money intercepted to cover alleged pension underfunding. It’s the latest example in the expanding story of how pensions and municipal bondholders are locking up key assets of financially troubled cities and towns across the state.
The Bond Buyer reported on Friday that Chicago’s firefighter pension initiated the intercept process for two claims totaling $3.3 million for its 2016 and 2017 contributions. The city denies the obligation and claims it fulfilled its statutory requirements, though the Illinois Comptroller has begun holding money back from the city.
“Sources said the police fund may also soon act to cover what it considers are delinquencies.”
Full details are in The Bond Buyer article.
Towns and cities across Illinois all are now subject to similar intercept if they fail to make pension contributions in amounts required by state law. Under the intercept laws, pensions can request the Illinois Comptroller to seize the shortfall out of money that ordinarily flows from the state to the municipality including, most importantly, the municipality’s share of sales taxes.
In the case of Chicago, however, only grant money flowing from the state to the city can be intercepted for pensions, not sales tax. But Chicago has already sold ownership of all future sales tax that it collects through the state (which comprise about 92% of its total sales tax collections) to an independent entity as part of the new, “securitized” approach to selling bonds. In other words, Chicago’s sales tax revenue from the state has already been hocked to pay bonds, though the city does retain residual rights to cash not needed to make the bond payments. The list of municipalities selling future revenue in that manner is likewise growing. Riverdale and Bridgeview sold similar securitized bonds.
Importantly, fiduciary concerns of pension trustees appear to have driven Chicago’s firefighter pension to request the intercept. The fund board’s chairman told The Bond Buyer, “The board of trustees has a fiduciary duty to ensure that all monies due and owing to the fund are contributed to the fund consistent with the requirements of the Illinois Pension Code. On behalf of participants and beneficiaries, the board of trustees will continue to take all necessary steps to fulfill that duty.” Notice, also, that the fund’s fiduciary counsel has apparently been at the center of negotiations with the city, which is indicated in The Bond Buyer article.
That same duty is no doubt weighing heavily on other pension trustees across the state as they consider exercising their intercept remedy. All pension trustees are charged by law with a high duty of care towards the pension. Wirepoints research found about 400 police and firefighter pensions that appear to have been shorted on pension contributions and may have intercept rights — for 2016 alone.
Why haven’t trustees of those pensions exercised their intercept rights? As we wrote earlier, they may fear they’d be killing the goose that lays their eggs. They’d be putting further financial drain on the municipality they need to survive in the long run. Whether that’s a legally valid reason under fiduciary standards, however, is questionable.
What we do know is the list of intercepts is growing. Harvey and North Chicago were the first. The Illinois Municipal Retirement Fund has also filed intercepts against four municipalities, according to the Bond Buyer.
Pensions and bondholders are playing the insolvency game smartly (from their perspective), as we’ve written often. It’s all a matter of getting ownership, liens or some kind of priority on anything and everything of value before things blow up. When that happens, they’ll get paid first. Service recipients and taxpayers are in growing danger of have nothing to work with. Even a formal bankruptcy wouldn’t help.
For further background on the intercept laws see our earlier articles below.
*Mark Glennon is founder and executive editor of Wirepoints.