Pensions

Glennon: Court-ordered taxes for pensions in Illinois begin; litigation turmoil looms | Opinion

An unprecedented appellate court decision this month ordered an Illinois city to approve a property tax levy specifically for its firefighters’ pension. That city, Harvey, already has effective tax rates of 5.7 percent for residential and 14.3 percent for commercial properties.

It’s a historic decision that may be the first of similar ones to come — eventually — for many of Illinois’ 600-plus local police and firefighter pensions.

The full decision by the First District Appellate Court of Illinois is linked here.

The Illinois Supreme Court had earlier made clear that benefits owed by pensions to retirees cannot be reduced under the Illinois Constitution. It had also made clear that, if a fund were to run dry, retirees could directly sue the municipality sponsoring the pension. However, no Illinois court had ever specifically ordered a tax to fund pensions.

Little known, however, was that Illinois courts also had indicated pensions need not run entirely dry before they would act. Now one court has acted by ordering a tax levy and payment of damages.

The court affirmed an injunction issued by the trial court requiring Harvey “to approve a line-item property tax levy specifically for the Pension Fund, which would be sufficient to meet the annual actuarial requirements” — basically, an “ARC” payment equal to normal costs plus an amount sufficient to get the pension to 90% funding by 2040.

It also awarded damages to the pension of about $15 million, consisting mostly of the difference, for previous years, between the actuarially required contribution and the lower amount Harvey actually contributed. How that damage award will be collected from Harvey isn’t clear. If it’s not directly included in the amount of the property tax assessment ordered by the court, it seems that deficiency would be indirectly reflected in future contribution requirements to be covered by that assessment, unless it’s somehow paid separately.

The appellate court decision turned on whether Harvey’s firefighter pension was “on the verge of default or imminent bankruptcy.”  That’s the standard it applied for determining when it may step in to order a property tax levy.

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The court based its decision partially on the financial state of the city, too. So, courts apparently are supposed to play the role of financial analysts for municipalities as well as pensions when they decide whether to start forcing taxes.

To put this more simply, we have a court now ordering blood out of a turnip. Harvey is broke and property in Harvey is already obscenely overtaxed. But it’s the very fact that Harvey is a bloodless turnip that helps makes it subject to court-ordered tax. Because they can’t pay, they have to pay, according to the court’s thinking.

This step raises many questions that would be difficult or impossible for any court to answer. Few of those questions are answered in the 82-page opinion, which is a garbled mess.

The initial, obvious question is this: Just how bad off does a pension have to be before a court will start ordering taxes for it? Is Harvey uniquely bad or will other towns and cities, now or later, meet its fate?

Harvey, unquestionably, presented an extreme set of facts. Graft and mismanagement have long plagued the city and it is far beyond insolvent. In recent years it underfunded its pension to an extreme, even by Illinois standards.

On the other hand, its most recent actuarial report, according to the court, says the pension was 27% funded and many of Illinois’ municipal police and firefighter funds are bleeding down towards that level. Chicago’s four pensions combined are only 21% funded.

Chicago and most other Illinois municipalities, however, are in infinitely better shape than Harvey.

Still, we simply don’t know how sick a pension will have to be to trigger a similar ruling.

Follow this link to read the full column.

Mark Glennon is the founder of Wirepoints. Opinions expressed are his own.

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