How the state can help pension funds collect delinquent pension contributions from municipalities

In 2011, the Illinois Pension Code (the “Pension Code”) was amended to allow pension funds to “garnish” delinquent municipalities with the help of the state. The funds can certify to the State Comptroller that a municipality is delinquent and the amount of that delinquency.¹ The Pension Code then requires the comptroller to withhold (or “offset”) state payments, which usually take the form of tax distributions, and remit the money to the pension fund.² Section 3-125(c) of the Pension Code, relating to police officer pensions, states:

If a participating municipality fails to transmit to the fund contributions required of it under this Article for more than 90 days after the payment of those contributions is due, the fund may, after giving notice to the municipality, certify to the State Comptroller the amounts of the delinquent payments in accordance with any applicable rules of the Comptroller, and the Comptroller must, beginning in fiscal year 2016, deduct and remit to the fund the certified amounts or a portion of those amounts from the following proportions of payments of State funds to the municipality:

(1) in fiscal year 2016, one-third of the total amount of any payments of State funds to the municipality;

(2) in fiscal year 2017, two-thirds of the total amount of any payments of State funds to the municipality; and

(3) in fiscal year 2018 and each fiscal year thereafter, the total amount of any payments of State funds to the municipality.

The State Comptroller may not deduct from any payments of State funds to the municipality more than the amount of delinquent payments certified to the State Comptroller by the fund.

Section 4-118(b-5), relating to firefighters, states:

If a participating municipality fails to transmit to the fund contributions required of it under this Article for more than 90 days after the payment of those contributions is due, the fund may, after giving notice to the municipality, certify to the State Comptroller the amounts of the delinquent payments in accordance with any applicable rules of the Comptroller, and the Comptroller must, beginning in fiscal year 2016, deduct and remit to the fund the certified amounts or a portion of those amounts from the following proportions of payments of State funds to the municipality:

(1) in fiscal year 2016, one-third of the total amount of any payments of State funds to the municipality;

(2) in fiscal year 2017, two-thirds of the total amount of any payments of State funds to the municipality; and

(3) in fiscal year 2018 and each fiscal year thereafter, the total amount of any payments of State funds to the municipality.

The State Comptroller may not deduct from any payments of State funds to the municipality more than the amount of delinquent payments certified to the State Comptroller by the fund.

How the Law Works

In practice, a pension fund calculates, with the help of an actuary, the amount of property tax for which the municipality should have levied and contributed to the fund. After notifying the municipality,³ the fund notifies the comptroller of the shortfall,⁴ and the comptroller offsets any payments the municipality is due to receive. The municipality may then protest the offset within 60 days.⁵ If the outcome of the protest is in the fund’s favor, the comptroller remits the money to the fund.⁶

The City of Harvey

In Harvey, a south-Chicago suburb with a population of about 25,000, the pension problem started decades ago, with the fire pension fund suing for contributions as far back as the ‘90s. In 2006, the Harvey Police Pension Fund sued the city for delinquent contributions.⁷ The case settled in February of 2008, with Harvey agreeing to pay the Fund more than $550,000 and to levy taxes to cover its contributions.⁸ The Fund filed a motion to compel enforcement of the settlement, in December of 2010, and the city was ordered to pay more than $7 million in employer contributions.⁹ The same year, the Harvey Fire Pension Fund sued the city once again.¹⁰ Harvey was ordered to pay more than $12 million in contributions.

In February of this year, the Police Pension Fund, in the first ever use of the amended Pension Code, went to the comptroller to collect the city’s delinquent contributions. In April, when the comptroller offset approximately $1.3 million of tax revenues earmarked for the city, Harvey sued for injunctive relief.¹¹ The city lost this case, forcing it to lay off several fire and police employees. On interlocutory appeal, the first district granted the TRO sought by the city and ordered that the money be remitted to the city pending the litigation. ¹² The city’s win was short-lived when, 10 days later, the Supreme Court vacated the first district order and remanded to the circuit court.¹³

In late April, the Fire Pension Fund certified its debt of $12.4 million to the comptroller. The comptroller’s legal opinion was that it was required to pay the Police Pension Fund first, who had priority of claim, and not pay the Fire Pension Fund until the claim was satisfied.¹⁴ And so, in May, the Fire Pension Fund intervened, and a TRO was granted in their favor, preventing disbursement to the Police Pension Fund.¹⁵ In June, a tentative deal was reached, in which the city would get $1.3 million being held, and the remainder would go to the two pension funds, bondholders, and the Illinois Municipal Retirement Fund.¹⁶ In July, a global deal was struck, in which the intercepted funds and future tax revenues would go to the various stakeholders, while leaving enough for the city to operate.¹⁷

Looking Forward

The litigation in Harvey has been closely watched as similar situations exist in several other financially troubled municipalities. Legislation has been introduced to make this law a little easier on economically distressed municipalities like Harvey. Senate floor Amendment 1 to Senate Bill 370, filed April 24 of this year, aims to curb the amount the comptroller may withhold.¹⁸ It would only allow the state to offset one quarter, as opposed to all, of the payments due the municipality. For so-called distressed cities, two other amendments to the bill seek to apply more gradual withholding rates and double the time a fund has to wait before making a claim to the comptroller.¹⁹ If the situation in Harvey is any indication of things to come, municipalities are well advised to begin negotiating with the pension funds to reach funding agreements, rather than risk litigation in which the state may be entitled to withhold vital revenues.

The author is Senior Counsel and Ethics Officer for the Illinois Department of Central Management Services.