Chicago loses first round in pension fund intercept litigation

BY SourceMedia | MUNICIPAL | 06/07/19 03:11 PM EDT By Yvette Shields

Chicago lost its legal fight to temporarily halt state grant fund intercepts and block their distribution to the city’s pension funds for alleged contribution shortfalls.

Larger questions that stand to impact future diversions and the state comptroller’s review process remain unanswered.

About $24 million in claims filed by the city’s pension funds are currently at stake but the price tag is expected to grow for future years.

The city’s lawsuit and a separate pending action by the firefighters' fund against the city raise questions about city funding statutes revised to help tackle a $28 billion tab for a system collectively funded at just 26.5%.

They also raise questions about the state intercept program that began last year allowing pension funds to divert state tax and other funds — or in Chicago’s case its grant funds — to cover funding shortfalls.

Thecity sued three of its funds and comptroller Susana Mendoza in May arguing that the funds filed improper shortfall claims and the comptroller, who is charged with managing the intercept program, has a flawed review process that acts a rubber stamp for the funds.

“The city has suffered and will continue to suffer irreparable harm as a result of the funds' false certifications and the comptroller's acceptance of those certifications as a basis for intercepting state grant funds that would otherwise be paid to the city,” according to the complaint.

With the first distribution of garnished funds approaching, the city asked the court to intervene. After three hours of arguments, Cook County Circuit Court Judge Neil Cohen denied a temporary restraining order requested by the city after concluding that attorneys failed to meet the legal threshold for such relief. That includes establishing the likelihood that the city would prevail on the merits of its lawsuit or that an emergency exists.

“I don’t believe the city has met the burden of irreparable harm,” Cohen told the court room.

Cohen also raised the specter of harm posed to the funds by withholding the amounts they claim to be owed, noting how long the city had been “kicking the can” on pension funding. The funds warned of their dire condition and negative cash flow situations where assets are being liquidated to cover annuitant payments.

The city also did not establish that the issue was “ripe” for such an order given that it had not yet exhausted its challenge process. The city must first complete a dispute process on the claims, the first of which is due June 10, and if denied by Mendoza’s office it could again ask to block any looming distribution.

While Cohen denied the TRO, his comments throughout the hearing made clear his positions on some arguments that will play out in the case going forward.

He told the comptroller’s office that he expected it “to do a real consideration” of any dispute and give “due consideration to the city’s protest.”

The comptroller’s office, represented by the state attorney general, has argued in this case and a prior lawsuit that was resolved by settlement involving the Chicago suburb of Harvey that it’s simply following the statutes enacted by lawmakers and if the cities don’t like it they should ask the legislature to change it.

To the pension funds, Cohen warned that their claim forms fall far short of meeting the legal definition of a “certified” form in which they declare the shortfall amounts, saying he wasn’t sure why the comptroller should be withholding any monies. “I don’t see any certification,” he said.

City attorneys defended the city’s request to block distribution of the disputed shortfalls, saying under Mayor Rahm Emanuel, who left office in May, pension funding was overhauled to bring up contribution levels. “That is happening,” attorney Weston Hanscom told Cohen.

The dispute over whether the city is, in fact, shorting the contributions is the subject of a separate lawsuit filed by the firefighters’ pension fund last year. It is being heard by Cook County Circuit Court Judge Sophia Hall. The comptroller is not named in that suit.

The city had hoped that while that dispute was making its way through the legal process, the other three funds would restrain from filing claims with the comptroller. They did not and that led to the city-filed lawsuit being heard by Cohen.

The tax and pension statute dispute to be decided by Hall stems from the city’s interpretation of existing pension code rules. The city believes the difference is reflective of a loss in collections between the city's tax levies and the actual collections from those levies, and the funds must absorb that loss. The funds argue the city must make the full contribution amount laid out in statutes.

Under Emanuel’s overhaul of pension funding, the police and fire contributions ramp up between 2016 and 2020 to an actuarial level the following year to reach a 90% funded target by 2055. The muni and fire funds’ five-year ramp began several years later and is supposed to reach 90% funded by 2057.

As the dispute plays out, new Mayor Lori Lightfoot must come up with nearly $280 million next year to cover the shift to an ARC for the police and firefighters and another $310 million in 2022.

The intercept process was enacted as part of an updated pension code that allows pension funds to intercept state funds to cover shortfalls in actuarially based or statutorily contributions by filing claims with Mendoza’s office.

Local public safety pension funds outside Chicago and the Illinois Municipal Retirement Fund, or IMRF, can seek the diversion of tax funds that flow through the state under revisions made to the pension code. In Chicago’s case, its four funds can seek only the diversion of grant funds under statutes specifically enacted for the city. The city received $269 million in state grants last year and the 2019 budget projects $299 million.

Mendoza began enforcing the intercept mechanism early last year. So far only funds from Harvey, North Chicago, and Chicago have triggered intercepts for their public safety funds, with a handful of others triggered for IMRF shortages.

The widespread use of the intercept that some researchers and market participants feared could result in local government fiscal strains has not occurred. The intercept also has sparked worries that bondholders’ legal claims will fall behind pensioners as distressed governments try to preserve funding for critical services.

A status hearing is set for June 13th on the Cohen case titled city of Chicago v. The Chicago Policemen’s Annuity and Benefit fund, the Municipal Employees Annuity and Benefit Fund, and the Office of the Comptroller of the state of Illinois.

A status hearing is set for June 18 on the Hall case which is currently in the briefing stages. It is titled Retirement Board of the Firemen’s Annuity and Benefit Fund of Chicago and The Firemen’s Annuity and Benefit Fund of Chicago v. Chicago.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

fir_news_article