The Week in Public Finance: This Illinois Town Is on the Brink of Bankruptcy. How Many Will Follow?

Harvey, Ill., is facing insolvency thanks to its pension crisis. Some say it won't be the only one.
by | May 18, 2018
A former manufacturing town that saw its greatest growth in the 1950s, Harvey, Ill., today is facing bankruptcy. (Flickr/Adam Campbell)

Two cities in Illinois are facing a cash shortage thanks in large part to the state. And some say more cities may soon be facing the same fate.

At issue is an eight-year-old state law that is designed to compel municipalities to fund their public safety pensions according to statutory minimum levels. In places that fail to do so, police and firefighter pension boards can petition the state comptroller to intercept state revenues due to the cities and towns.

That's what's happening in the two Chicago suburbs of Harvey and North Chicago. But, says Laurence Msall, president of the nonprofit, Chicago-based Civic Federation, they won't be alone for long. “Harvey is really only the tip of the iceberg in terms of financially distressed cities in Illinois,” he says. A big reason, he adds, is because the state doesn’t have any reasonable mechanism for identifying and helping these struggling cities “short of pushing them into bankruptcy.”

According to an S&P Global Ratings analysis, more than a dozen Illinois cities aren’t paying their state-mandated minimum pension contribution. East St. Louis, for example, is behind on its bill by more than $1 million. On the northern end of the state, Rockford is behind by nearly $2 million.

Meanwhile, some cities have been resorting to last ditch efforts to make payments. Danville hiked property taxes and tripled its annual so-called public safety pension fee to try and cover its debt. The town of Alton sold off its sewer system and water treatment plant this year to pay its unfunded pension liabilities. “It begs the question," says Msall. "What will they do next year?”

Harvey is by far the most severe case. According to two court rulings, it is roughly $22 million behind on payments to its police and firefighter pension funds. That’s what the city spends on services in an entire year. As a result, the state comptroller is now withholding $1.8 million, or 8 percent of the city’s general fund revenue, in state funds originally intended for Harvey.

Comptroller Susanna Mendoza has also intercepted from North Chicago about $338,000, or a little less than 2 percent of the city's annual general fund revenue. It is delinquent in paying into its firefighter fund by more than $850,000.

According to the law, the comptroller will continue to intercept state funds until the outstanding claims have been paid. In the case of Harvey, that prospect has damning implications given the total payments owed. Even before funding was seized, the city was facing the prospect of going broke. Now, the intercept law appears to have simply accelerated its fiscal downfall.

While it’s unlikely the state would intercept the entire amount owed by Harvey given its fiscal situation, S&P analyst Eric Harper notes there’s a lot of uncertainty. “These are the first two cases,” he says, “so this is somewhat unchartered territory.”

The idea of a state enforcing pension funding discipline on localities is not new and is viewed as a successful tool, even in Illinois. One of the best-funded pension plans in the country is the nearly 90 percent funded Illinois Municipal Retirement Fund, which has long had the ability to enforce payments into the plan. The Missouri Local Government Employees Retirement System and Idaho's public employees fund also mandate payment by state statute. And Texas has the pension payment mandate in its constitution.

But such oversight has not been required of the more than 650 locally managed public safety plans in Illinois. And even though there’s now an enforcement mechanism, it’s coming at the 11th hour in some places and causing even more fiscal stress.

In the case of Harvey, officials were talking about insolvency two years ago. Last year, the city paid the equivalent of 10 percent of its operating budget into the police and fire pensions (and it still wasn’t enough). It is regularly defaulting on its bonds. And now, it’s talking about laying off half its public safety force.

There is a potential silver lining. The severity of the situation could spur state legislators to pass a bill now under consideration in the Illinois House that would set up a clear procedure for helping distressed cities, including establishing an oversight board and allowing Chapter 9 bankruptcy. The Civic Federation has helped author the bill. "We’d hope that anyone who talks about trying to help Harvey would look at doing something more comprehensively,” says Msall, “that creates a structure for the state to help all local governments.”

 

In other public finance news this week:

Payday Lending Rules Survive Repeal Threat

Consumer protection groups scored a victory this week after a bill that would have repealed payday lending restrictions died in Congress. The lending restrictions were issued by the Consumer Financial Protection Bureau in 2017 and were set to go into effect in 2019. Earlier this year, President Trump’s budget director and interim bureau chief, Mick Mulvaney, announced he wanted to revisit the new regulations. That effort failed to meet the deadline for a vote, however, leaving the regulations intact.

While this effort fizzled, some are still worried that with Mulvaney at the helm, state attorneys general have lost their federal consumer protection ally. Still, it’s important to remember that the most powerful tool against payday lending -- setting interest rate caps -- remains in the hands of states.

 

Amazon Blasts Seattle’s New Tax

The Seattle City Council voted unanimously this week to levy a so-called head tax on its largest employers as a way to raise money for affordable housing and homeless services. The new law, which charges large employers a $275-a-year fee per employee, is expected to raise $50 million. But the internet commerce giant Amazon will be the biggest contributor, with an estimated $10 million fee.

Amazon’s relationship with Seattle has turned sour in recent months, particularly as the company narrows down its search for a second headquarters city. The company issued a statement and was quick to slam the council’s “hostile approach and rhetoric toward larger businesses, which forces us to question our growth here.” Vice President Drew Herdener also noted the city’s revenue growth has outpaced its population increase. “The city does not have a revenue problem -- it has a spending efficiency problem.”

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