Harvey, pension funds reach deal on dividing up embargoed state money, end court fight over pension funding

By Jonathan Bilyk | Jul 27, 2018

Editor's note: This article has been revised from an earlier version to now include comments from an attorney for the Harvey Police Pension Fund and a spokesperson for the Illinois Comptroller's Office.

In a deal that could set a precedent for other financially struggling municipalities to follow,  the city of Harvey has reached a deal with its police and firefighter pension funds to end a court fight over how much of the money Harvey gets from the state of Illinois the city should be allowed to spend on current day-to-day operations, rather than police and fire department retirees’ pensions.

Under the terms of the deal, which was reached earlier this month and approved by the Harvey City Council on Monday, Harvey agreed to dedicate 35 percent of the money it receives from the state as the city’s share of state sales tax to fund pensions for its retired police officers and firefighters. For the first few years of the deal, the police pension fund would receive 25 percent of the city’s state sales tax disbursement, while the firefighters’ fund would take 10 percent. However, once the police pension fund achieves full funding in coming years, the firefighters would take the larger share, according to a description of the deal provided by attorney Robert Fioretti, who represented the city of Harvey in the matter.

“This deal puts us on solid footing for the future,” Fioretti said.

Bob Fioretti  

Attorney Mike Moirano, who represents the Harvey Police Pension Fund, confirmed the deal, noting the settlement would allow the pension fund to receive nearly $9 million in required back payments the pension fund has maintained the city failed to pay through the years.

He said, under the deal, the money would be paid from the state directly to the pension funds, entirely bypassing the Harvey city treasury.

Moirano said the pension fund projects the $9 million would be fully repaid in about 6-7 years.

"Our goal was never to shut down the city," Moirano said. "We only wanted to get it back on track to fund the pensions as they should have been."

He added: "There's only so much you can tax the poor people of Harvey."

Earlier this spring, Harvey sued Illinois Comptroller Susana Mendoza, after the comptroller’s office, at the request of the Harvey Police Pension Fund, slapped an embargo on millions of dollars in state sales tax revenue which would ordinarily have been distributed to the city. The comptroller’s office had acted under a state law which requires the comptroller to intercept and hold any state tax revenue going to a municipality, if one of the municipality’s pension funds reports the local government has failed to fund its pensions at the levels set by law.

The comptroller’s action against Harvey represented the first ever of its kind taken under that state law against a municipal government.  

In April, Harvey sued, asserting the comptroller’s intercept was “unlawful” and would cause the city to “face catastrophic issues regarding safety, security and maintenance of adequate services” to the residents of the south suburban community. The city also initiated mass layoffs in its police and fire departments, saying the moves were needed after the comptroller’s funds intercept left the city short of the money it said it needed to maintain its prior level of service and operations.

Judge Raymond Mitchell initially refused the city’s relief request. The city then appealed, and secured a win before the Illinois First District Appellate Court, which ordered the comptroller to release its hold on the money. However, that ruling was then vacated by the Illinois state Supreme Court without elaboration, sending the matter back to Judge Mitchell.

In the weeks since, the parties have engaged in “tough negotiations,” said Fioretti, ultimately resulting in the settlement agreement. On July 17, Judge Mitchell lifted a temporary restraining order regarding the funding. The final version of that restraining order had roughly mirrored the terms of the final settlement agreement, giving the city access to about 65 percent of the state sales tax dollars.

In May, Mendoza’s office released its hold on hundreds of thousands of dollars from a special Harvey home rule sales tax, allowing the city to pay that money to bondholders, represented in the proceedings by the Amalgamated Bank of Chicago. The comptroller’s office said it had determined those funds did not qualify as state revenue under the terms of the law, so the comptroller could not lawfully without that money.

Fioretti said bondholders would continue to be paid from those dedicated city sales tax dollars.

The litigation has been closely watched by many in Illinois and elsewhere, as its outcome could set the tone for other similar scenarios expected to play out in other financially struggling Illinois cities and villages, who have similarly fallen behind the pension funding levels required under state law for police and firefighter retirees.

Fioretti said the Harvey settlement represented a “rational, reasonable solution,” which he said could “set a pathway” for others in Harvey’s situation – “or worse” – to follow.

Absent such a settlement, he noted under state law municipalities could face merely a total loss of state funding, which could set struggling communities down a “path to a de facto bankruptcy.”

He advised other municipalities facing pension funding shortfalls to begin negotiating with their police and firefighter pension funds to perhaps reach a similar agreement on how to divide state funds, which could be similarly at risk of embargo.

A spokesman for Mendoza’s office said Friday the comptroller is aware of the existence of the deal, but has not yet received documents signed and executed by the parties.

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Circuit Court of Cook County City of Harvey Illinois First District Appellate Court Illinois State Comptroller Illinois Supreme Court Moirano Gorman Kenny LLC

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