While leaving it to the elected leaders of the city of Harvey to figure how much tax to levy to get the money they need from property tax payers, a state appeals court panel has ruled the south suburban city’s pension fund is on the brink of default, and, thus, the pension board for the city’s firefighters has a valid claim under state law to force the city to cough up nearly $11 million in unpaid and underpaid pension fund contributions.

On Aug. 4, a three justice panel of the Illinois First District Appellate Court in Chicago determined the city’s mayor and council for years had improperly “abused” their “discretionary powers” under state law to fund the city’s firefighter pension fund, leaving the fund on the brink of default and bankruptcy.

This, the appeals justices said, meant a Cook County judge had been correct in determining past Illinois legal precedents, which had generally found courts can’t order cities or other governments to pay certain amounts to fund public worker pensions, don’t apply in Harvey’s case, and the judge was within her rights to order the city to pay the amount it had allegedly underfunded – regardless of the city’s claims it had not been able to do so.

“Based on the testimony from multiple witnesses, Harvey’s blatant disregard for the Pension Fund over a long period of time, and the dwindling status of the Pension Fund assets, this court finds that the Pension Fund is on the verge of default, which establishes a valid and enforceable constitutional right to funding,” the justices wrote.  “Harvey has set up a collision course over a period of many years where the beneficiaries of their firefighters’ Pension Fund are being paid substantially out of the money that the firefighters have themselves contributed to the Pension Fund and the money the Pension Fund earns from investments, causing an ever increasing dissipation of the Pension Fund’s assets, which will result in the fund having no assets to pay its beneficiaries or fulfill its obligations under the fund.

“In essence, Harvey is robbing Peter to pay Paul, but what happens when Peter retires?”

Justice Robert E. Gordon authored the opinion, with justices Jesse Reyes and Bertina Lampkin concurring. Lampkin added a special concurring opinion.

The case had landed in Cook County court in 2010, when the Board of Trustees of the City of Harvey Firefighters’ Pension Fund first filed suit against the city of Harvey, alleging chronic underfunding of the pension fund, which managed pension money for 67 retired firefighters, had left the fund teetering on the verge of insolvency.

Court documents indicated actuaries had indicated the city had “ ‘deprived the Pension Fund of $8 million in actual contributions and another $2 million in actual investment gains on those contributions’ because Harvey failed to make proper contributions to the Pension Fund from 2005 to 2013.” By 2013, this had depleted the pension fund’s assets to just about $11 million, a deficiency of about $23 million compared to the amount actuaries believed was needed.

In her special concurring opinion, Lampkin noted in 2014, the pension fund “paid approximately $157,000 a month to the beneficiaries” while the city’s 47 active firefighters contributed “only $25,000 a month” to the fund.

“The contributions of the active firefighters were being used to pay the current beneficiaries instead of being invested for the active firefighters’ future pension benefits,” Lampkin wrote.

“This is not merely a matter of an underfunded pension plan,” Lampkin added. “The severe fund deficiency and alarming rate of asset depletion, and Harvey’s demonstrated inability to collect on its tax levies to support its obligations establish that the Pension Fund’s ability to pay the beneficiaries will be extinguished in the near future.”

After years of arguments in the trial court, then-Cook County Circuit Judge Mary Mikva, who now also serves as a justice on the state’s First District Appellate Court, determined the county’s failure to pay violated the Illinois Pension Code, and the city was obligated to pay the pension fund nearly $11 million in damages.

She stopped short of ordering the city to raise taxes, however, saying the actual act of raising taxes should be left to the city.

The city appealed the decision, arguing Mikva had been off base, as the Illinois Supreme Court and other courts in Illinois had for decades affirmed the Illinois state constitution and Pension Code, while requiring cities and other governments to pay their workers’ pensions, did not give pension funds the right to demand certain funding levels. The city further argued the court order violated the separation of powers, as it amounted essentially to the court ordering the city to either spend its tax money in a prescribed manner or to raise taxes.

The justices, however, said the city does not have an absolute right to decide how much money to put into its pension funds, as the state Pension Code mandates governments annually collect and allocate enough money to meet their pension obligations.

“… Although Harvey is correct in stating that it has the authority to set its levies, it cannot abuse its discretionary powers pursuant to the Code,” the justices wrote. “The Code explicitly states: ‘the municipality shall annually levy a tax upon all the taxable property of the municipality at the rate on the dollar which will produce an amount which … will equal a sum sufficient to meet the annual actuarial requirements of the pension fund.’ Although Harvey is allowed discretion by the Code, the General Assembly requires Harvey to enact a levy for the Pension Fund, which Harvey has failed to do. Because Harvey has abused its discretion, this court affirms the trial court’s ruling that the separation of powers doctrine does not bar the Pension Board’s claim.”

The justices also cast aside the city’s attempt to argue it could not make the “required actuarial” payments to its firefighters pension fund because it did not collect enough in taxes to do so. The justices said, rather, the failure to pay into the pension fund came because the city chose to make up for the shortfall in taxes by paying other obligations at the expense of the pension fund. Essentially, the justices said, the city doesn’t have the discretion under state law to short the pension funds exclusively, but can only decrease payments to those funds proportionately to all others.

And justices further chided Harvey city officials for years of financial mismanagement in other areas, as well, pointing to scandals and court orders against the city and its officials for, among other things, steering millions of dollars of funds intended to support the development of a hotel to fund other city expenses, including payroll, and “Harvey’s aldermen’s $80,000 unregulated expense accounts, paying the relatives of prominent city officials thousands of dollars for doing relatively simple tasks such as creating a social media website and shoveling snow.”

“Harvey has presented no testimony and no evidence to demonstrate that it has the ability to manage its finances and properly fund the Pension Fund,” the justices wrote.

As did Mikva, however, the justices also declined to issue a court order directing the city on how it must fund its pension obligations, saying deciding how much to tax should be left to the mayor and city council.

“Taxes levied by Harvey are not collected at the rate of 100 percent and, as a result, there is clearly some discretion required in order to make this projection,” the justices write. “As long as Harvey, within its discretion, is levying an amount that would be enough to produce the (actuarily)-mandated contribution, Harvey would be meeting its obligations under the Pension Code. Harvey ‘is vested with the authority to take the final action: adopting an ordinance levying the tax.’”

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