The Harvey crisis puts the Illinois machine in a bind – Wirepoints Original

By: Ted Dabrowski and John Klingner

One can imagine Illinois Comptroller Susana Mendoza didn’t really want to garnish the city of Harvey’s revenues. It certainly doesn’t fit into the plans of the state political machine. The garnishment only exposed just how pervasive the local pension crisis is by pushing Harvey into defacto bankruptcy – even if only temporarily.

A clause from a 2011 pension law recently forced the comptroller to intercept Harvey tax revenues as punishment for failing to fund the city’s police pension plan. Harvey’s police fund was the first to ever demand that the comptroller intervene and garnish city funds. Under the 2011 law, police and fire pension funds that don’t receive their legally required funding may demand the state comptroller intercept their municipality’s tax revenues. The comptroller must seize the funds but only if the pension plans certify underpayment.

As a consequence of the interception, Harvey fired 40 of its public safety workers to avoid insolvency. The law has rendered the city what most of us would call bankrupt.

The problem this creates extends far beyond Harvey. The garnishment clause may wreak havoc on hundreds of Illinois communities, bringing their long-running financial crises to a head. A Wirepoints report revealed that 368 of Illinois’ 651 public safety pension funds were shorted their full payments in 2016. In all, that means about 200 municipalities – and not just Harvey – could have their tax revenues garnished.

*Table updated 4/25/18

The law could trigger a wave of de facto bankruptcies in those cities that can’t afford to pay for both their pensions and their daily operations. East St. Louis, Kankakee, North Chicago and many others will fall deeper into the abyss if they are forced to pay their full bills. And bigger cities like Springfield and Rockford have already warned of the possibility of firing public safety workers because of higher pension costs.

That’s an enormous problem for the state political machine. The more cities that fall into a mess, the more it condemns their failed policies and lack of action.

Perhaps that explains why the courts have already stepped in to temporarily halt the comptroller’s garnishment of Harvey’s revenues at the behest of the city. And why Rep. Napoleon Harris, who represents the district that includes Harvey, is already considering a bill to repeal the garnishment clause.

Just the beginning

It’s surprising that Harvey is the only city to have faced garnishment.

Why aren’t the other pension funds that have been shorted demanding the comptroller step in? Why aren’t public safety union officials demanding full pension payments in every city?

Because garnishments would ruin the status quo. If city funds are garnished, layoffs and pay cuts like those in Harvey would occur across the state.

Union officials want to avoid that. Their power comes from a growing workforce and rising payrolls. So they’ve always been willing to forego pension funding if it means more money today for active workers.

The unions are gambling their members’ retirement security on a bet that taxpayers will eventually be forced to fund those retirements, thanks to Illinois’ constitutional protections. They’re gambling the money will have to come from somewhere.

City officials have also made a choice. They know compensation cuts to workers are political suicide. And Illinoisans already pay the highest property taxes in the nation, so massive tax hikes are difficult too. Other reforms, from pension benefit changes to collective bargaining reforms, are controlled by state politicians. So local officials choose to do nothing but muddle along as city finances and vital services deteriorate.

Unaffordable promises

It’s no wonder why many cities can’t fund both their operations and pensions. The pension benefits owed to workers and retirees have grown at a pace that’s dwarfed Illinoisans incomes. That’s true in Harvey and everywhere else across the state.

In 1987, municipalities owed a total of $2.6 billion in benefits to public safety workers and retirees across the state. Today, that number has jumped to $23.4 billion. That’s nearly an 800 percent increase.

Total benefits owed have grown six times more than household incomes and seven times more than inflation.

In Harvey, benefit growth has completely overwhelmed struggling residents’ ability to pay for them. Since the turn of the century, Harvey public safety pension benefits owed to active workers and retirees have grown an average of 4.6 percent a year. That’s more than double the annual growth in inflation. Meanwhile, household incomes have collapsed. They’ve fallen 2.3 percent a year over the past decade and a half. Poverty has grown to nearly 40 percent and the city has lost 10 percent of its population.

Revealed

Harvey has put the state political machine in a bind. If lawmakers allow garnishments to continue, a wave of pension funds could demand that the state intercept their city’s revenues. That could lead to cash crunches in struggling municipalities and result in pay cuts and layoffs for public sector union workers across the state.

And the comptroller’s interceptions will make lawmakers look bad. By garnishing city revenues, Illinois politicians will overtly protect and prioritize public pensions over social services and health care in the state’s worst-off communities.

On the other hand, if lawmakers reverse the garnishment law via legislation, they’ll reveal their unwillingness to defend public sector pensions.

Politicians can try to rewind the Harvey situation if they want, but it’s too late. The true size of Illinois municipalities’ mess has been revealed.

The only way out is structural pension and labor reforms. 401(k)s for new workers. A constitutional amendment to alter pension benefits. Authority for localities to determine their own collective bargaining rules. All are a must for cities to begin fixing themselves.

And for some municipalities whose finances are beyond repair, bankruptcy might be the only alternative that can both protect retirees and allow cities to reorganize their debts.

Harvey has given Illinoisans a glimpse of what happens when the status quo that the political class is so desperate to preserve stops working. And it isn’t pretty.