Bonds

A Harvey, Illinois, pension fund claims it’s entitled to share in the Chicago suburb’s American Rescue Plan funds and wants to block the distribution of aid until a judge decides.

The financially stressed suburb south of Chicago, which has battled over the last decade with its public safety pension funds, the city of Chicago, and bondholders about its obligations, settled a legal dispute with its police and firefighters’ over past due payments in 2018.

The Firefighters Pension Fund is now staking a claim on Harvey’s share of the $350 billion for local, state and tribal governments in the coronavirus relief package President Biden signed in March, arguing Harvey’s share is subject to the 10% claim on city tax funds that flow through the state and are sent directed to the fund the city agreed to in a 2018 settlement.

The fund went to court Thursday seeking a temporary a restraining order barring distribution of the ARP funds to Harvey until the new litigation is decided.

“The Firefighters Board has raised a fair question because it arguably appears” that ARP funds to be paid to the state and allocable to Harvey will constitute “state funds” subject to interception by the Firefighters Board under the parties’ settlement, the filing reads. The federal statute’s language “does not prohibit” the state from honoring the “Firefighters Board’s contractual right to intercept 10% of those funds.”

The pension fund’s contention is based on language adopted in the ARP legislation that modifies provisions of the Social Security Act to “help states and local governments harmed by related revenue losses.”

States and territories are to receive the funds under one provision while metropolitan cities, counties, and non-entitlement units of local governments are governed by another. Harvey falls under the non-entitlement category which generally describes communities under 50,000. Their funds flow first to the state for distribution while metropolitan cities and counties get their funds directly from the federal government.

Both Social Security Act provisions include language banning “deposits” of ARP monies into pension funds. But the section governing local municipalities specifically bars those units of local governments set to receive the funds from depositing the aid into pension funds — not the state.

“The plain language of the statute supports the conclusion” the state is not prohibited “from depositing funds into pension funds” for local governments, the filing argues.

It may be an unintended loophole as guidance released by the Treasury Department May 10 makes clear the legislation’s intention to bar deposits that bring down an unfunded liability.

The precise impact of the ban is still being digested by market participants as the guidance goes further in explaining that Treasury interprets a “deposit” to refer to an extraordinary payment into a pension fund for the purpose of reducing an accrued, unfunded liability.

It considers that form of a “deposit” distinct from a “payroll contribution” which leaves the door open to using funds for pensions in some situations when tied to the pandemic. The pension deposit issue is one of many questions posed by Treasury to stakeholders seeking input during a 60-day comment period that potentially could lead to revisions.

The TRO request argues that the lack of a ban on states making deposits to local pension funds in the statute governing local governments “shows that Congress intended to treat the two types of funds differently.”

The filing acknowledges that some might not agree but argues that the court can’t “re-write federal statute” even if the court believes Congress “accidentally” omitted the prohibition on states making the deposit into local governments.

The relief dollars in questions would go directly from the state to the local pension fund under the intercept settlement agreement.

Cook County Circuit Court Judge Raymond W. Mitchell and attorneys for Harvey, the pension fund and Comptroller Susana Mendoza, whose office is charged with managed the state intercept of funds, agreed verbally to a “standstill order” as parties sort out the timing of aid distribution.

Calculations are still being made on what non-entitlement communities like Harvey receive and once the state receives the federal dollars it has 30 days to distribute. Bigger cities and states are receiving their share directly from the federal government. Mitchell oversaw the previous pension fund dispute. Mendoza is represented by the Illinois Attorney General’s office.

A group of Harvey bondholders and the police fund are also parties to the 2018 consent decree but neither is seeking a piece of the ARP. A lawyer for the police fund told Mitchell it had no position on the firefighters’ claim and should the court decide the dollars are subject to the intercept might be willing to waive a claim if the city demonstrated a desperate need for the dollars.

Harvey’s attorney, Robert Fioretti, told the court federal input was needed to interpret the statutes and he planned to contact the U.S. Attorney given the recent release of Treasury guidance that provides rules on ARP’s eligible uses. The guidance language also bans the use of ARP aid for judgments, settlements, or consent decrees.

Briefs from Harvey and the firefighters are due over the next three weeks with the next hearing date set for June 9.

The city would like to hold on to the funds as it seeks to resolve its overdue water fees to Chicago and restructures its debt in a bond issue later this year or next in an attempt to the long struggling city on a path to fiscal solvency.

The 2018 agreement allowed Harvey to keep a chunk of its state collected funds and protected revenues pledged to bondholders. The agreement freed up revenues such as sales and motor fuel taxes and its local share of income taxes that Mendoza’s office would have intercepted. The diversion of funds was permitted under a 2011 public safety pension funding law that the comptroller began enforcing in 2018.

Police receive 25% of Harvey’s “state funds” until a $7.3 million 2015 court judgment on overdue payments is paid off and the firefighters receive 10% until a $12.4 million 2015 judgment is paid off. Once the police claim is retired, the 25% would then go to the firefighters. If both the police fund and the firefighters fund submit future claims for overdue payments, the new claims will be paid in equal amounts, until one of the claims is paid in full.

The settlement also protects holders of $6 million of 2008 hotel-motel/sales tax bondholders who under city ordinance had long enjoyed a priority claim on state sales tax and home rules sales tax.

At the time of the settlement, the police fund was 51% funded and the fire 22%.

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