Harvey revenue agreement highlights need for pension reform – or municipal bankruptcy

Illinois’ pension laws are forcing the city of Harvey to pay its creditors through short-term negotiated agreements just to meet payroll.

Harvey reached a short-term agreement June 6 with its police and fire pension funds and bondholders to access a portion of the $2.35 million in tax revenues being withheld from the city by the Illinois comptroller, the Chicago Tribune reported.

But without significant pension reform, Harvey will continue to miss payments and cut services, and stakeholders will battle over the scraps that are left. If Illinois lawmakers won’t make meaningful pension reform possible, they should give Harvey and cities like it the option of filing Chapter 9 bankruptcy.

The agreement came after the city failed to make pension payments mandated by state law. As required under Illinois law, the Illinois comptroller began withholding state tax revenue from the city to distribute to the police fund, which made the first claim for delinquent pension payments. Harvey had to lay off nearly 40 police and firefighters in the wake of the garnishment, and was on the brink of being unable to meet its payroll and vendor payment obligations.

The police pension fund wasn’t the only one laying claim to Harvey’s state tax revenues. Harvey also failed to contribute the required amount to the firefighter pension fund. And city bondholders have demanded their cut, too.

Under the agreement, the city will get access to $1.3 million of the withheld funds, while the rest will be split among the police and firefighters pension funds, the Illinois Municipal Retirement Fund, and bondholders. This agreement will allow the city to meet this week’s payroll and settle outstanding bills for vendors such as garbage removal service providers, but there’s nothing permanent on the horizon. In the long term, the uncertainty will continue.

What’s happening in Harvey is essentially an informal and disorderly bankruptcy – caused by years of corruption and mismanagement that has led to now-crippling pension debt. The city of Harvey owes over $87 million in pension debt, and has already been forced to cut services because of it. An Illinois circuit court awarded Harvey’s police pension fund $7 million for amounts owed by the city, and this was affirmed by an Illinois appellate court in a 2017 decision. An Illinois court awarded $11 million to the city’s firefighter pension fund shortly thereafter. Because of the Illinois Supreme Court’s interpretation of the state constitution, those are debts the city can’t avoid by normal means.

Other U.S. cities such as Central Falls, Rhode Island, have shown where the mismanagement and overpromises that have taken place in Harvey can lead.

But the improvement in Central Falls’ fiscal situation as it emerged from bankruptcy also gives hope that if Illinois gives struggling cities such as Harvey the opportunity, municipal bankruptcy can provide them a fresh start and a path forward in an otherwise impossible situation.