The Fiscal Firebomb Looming for Small Cities in Illinois

A state law meant to hold municipalities accountable for pension payments may actually worsen a coming fiscal crisis.
July 2018
A former manufacturing town that saw its greatest growth in the 1950s, Harvey, Ill., today is facing bankruptcy. (Flickr/Adam Campbell)
By Frank Shafroth  |  Columnist
Director of the Center for State and Local Government Leadership at George Mason University

The southern Illinois city of Alton, population 28,000, has sold off its water treatment plant. The roughly $54 million it will clear from the sale will help pay down unfunded pension liabilities. Over in Kankakee, home to some 26,000 Illinoians and the Kankakee Community College, the municipal sales tax is increasing to help pay off that city’s pension tab. Its annual minimum pension contributions are eating up more than a quarter of its budget.

Like Alton and Kankakee, Harvey, Ill., is also struggling to make its mounting pension payments. But unlike those other two cities, Harvey’s economy is weak, it has no assets left to sell and its tax base is tapped out. Some 4,000 property tax bills have not been paid -- the most for any city in Illinois. “We have an aging population, a declining population, a fixed-income population,” town attorney Bob Fioretti told the local PBS station, WTTW.

In light of its nonpayment of pension contributions, Harvey is the first to suffer the consequences of an eight-year-old Illinois law, which allows the state comptroller to garnish a municipality’s tax revenues if the locality fails to fund its local pensions. In the case of Harvey, about $1 million of its tax revenues have been diverted by the comptroller to pay a pension IOU of about $1.4 million. Without the $1 million in tax revenue, the city has announced it will lay off nearly half of its police and fire department.

Harvey may be the first to be punished under the law, but it certainly won’t be the last. And just like Harvey, Chicago Civic Federation President Laurence Msall told WTTW, other municipalities may also opt to cut their police and fire personnel if the city garnishes their taxes. According to research by S&P Global Ratings, a “substantial share” of the state’s approximately 656 suburban and downstate public safety pension plans could be at credit risk. “If they ignore the law and don’t make the contribution as Harvey has,” Msall noted, then pension officials have the “ability to seek an intercept of state revenues that would otherwise come to the municipality.”

Ironically, Illinois adopted its pension law as a way to ensure smaller municipalities would stop shorting their pension fund contributions -- a habit the state infamously has. The state pension fund currently is in serious arrears to the tune of $137 billion.

Illinois does have something called the Local Government Financial Planning and Supervision Act. Under it, a municipality with a population under 25,000 suffering a “fiscal emergency” may petition the state to establish a financial planning and supervision commission to address such a fiscal emergency. But Harvey, with a population of 25,361, isn’t eligible.

Given the city’s dire situation, Msall argues that Illinois needs to step in and either absorb Harvey’s pension into the state fund or put together an emergency financial team to take control of the city’s finances. In addition, Msall says, the state needs to give municipalities the right to file for bankruptcy -- something they can’t currently do.

I would suggest that Illinois also create, as Virginia has, an independent state fiscal oversight commission to assess specific fiscal/budget issues and recommend, if warranted, further assistance to help stabilize areas of concern. It should implement, as Rhode Island did in the wake of Central Falls’ municipal bankruptcy, a quasi-SWAT team of city managers and legislators to provide technical assistance and potential state assistance to assess municipal operations and develop long-range financial forecasts for revenue. And finally, the state should adopt a revenue-sharing program, modeled after the one signed into law by former President Ronald Reagan, which assessed relative fiscal need, local tax effort and population.

But this being Illinois -- and an election year -- Gov. Bruce Rauner has been silent about the brewing fiscal catastrophe for Harvey and dozens of other Illinois towns and cities. Indeed, the state’s recent budget included no help for Harvey.