Monday, August 21, 2017

Illinois Appellate Court Finds City of Harvey’s Underfunding of Firefighter Pension Fund Unconstitutional

Many who are even somewhat familiar with the south suburban City of Harvey know that it has fallen on extremely bad financial times. Amidst what seems likes almost continuous allegations, investigations and indictments of City officials, the Illinois Appellate Court has found the firefighters’ pension fund to be nearly bankrupt in violation of the both the state Constitution and the Pension Code.

It seems that for several years prior to 2010 Harvey either levied a grossly insufficient amount to fund the firefighters’ pension fund and/or failed to contribute even 50% of the suggested amount necessary to maintain appropriate funding. During fiscal years 2011 through 2013 Harvey failed to either levy or contribute to the pension fund. As of 2014, the Harvey Firefighter Pension Fund was just over 27% funded and the City admitted not only had it failed to properly levy and contribute but that the City was in a precarious financial position without a clear plan to make up the funding deficit. 

The Pension Fund sued the City for, among other claims, violation of the Illinois Constitution and the Pension Code. The 1970 Illinois Constitution states “[M[embership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” The Pension Code provides that a municipality must levy and fund “sufficient” amounts to its employee pension funds. 

The Appellate Court reversed the trial court’s finding that Harvey could not be in violation of the Constitution unless it was “on the verge of bankruptcy.” Since it still had funds and investments, and it was still paying benefits to retirees, the trial court reasoned, it was not on the verge of bankruptcy and not acting unconstitutionally. The Appellate Court, in reversing, found that several factors pointed to the pension fund being in a dire situation, including the low funding percentage, but also including the facts that the City had a long history of either not contributing to the fund or grossly underfunding it so that it was slipping closer and closer to bankruptcy. Further, the City offered no plan to get funding back on track. The court found that this met the definition of being on the verge of bankruptcy.

Additionally, contrary to the City’s argument that the Pension Code does not specify the amount of money required to be levied or contributed to pension funds, Harvey had so underfunded the firefighters’ pension fund that it failed to even show  a good faith attempt to comply with the statute.

Public employers should see the Harvey case as a cautionary tale. Although few municipalities find themselves to be in the state of financial disarray that Harvey is in, it is clear that consistently underfunding any pension fund can lead to litigation and allegations of constitutional as well as statutory violations. Additionally, it’s a slippery slope to other problems, such as problems recruiting and retaining competent employees. Other public employers might sympathize with Harvey in that some of their financial woes are still the result of the economic recession which hit municipalities like Harvey worse in some ways. It is still incumbent on elected officials to spend their money wisely.  As the court simply stated “Harvey is robbing Peter to pay Paul, but what happens when Peter retires? “