When is a Pension Fund on the Verge of Default?
By Jeff Goodloe, IPPFA Deputy Counsel
Puchalski Goodloe Marzullo, LLP
2100 Sanders Road, Suite 110
Northbrook, IL 60062
(847) 666-5680
At one point the Harvey Firefighters’ Pension Fund (“pension fund”) had $18 million. Today it has less than $10 million. The pension fund has approximately 70 beneficiaries and 50 active firefighters. The pension fund pays over $2 million in pension benefits each year.
In 1993 the Board of Trustees of the City of Harvey Firefighters’ Pension Fund (“Pension Board”) sued the City of Harvey (“City”) for not properly funding the firefighters’ pension fund. The Pension Board and City settled that litigation in 1996 and entered into a settlement agreement. The settlement agreement provided that the City would ensure that it would turn over to the pension fund future property taxes levied and collected on behalf of the pension fund and future personal property replacement taxes (“PPRT”) collected on behalf of the pension fund. However, the City did not turn over property taxes and PPRT it collected for the pension fund. Additionally, the City then failed to levy or otherwise contribute to the pension fund the annual actuarial requirement (“AAR”)required by statute beginning in 2005. Between 2009 and 2013 the City only contributed $18,181 to the pension fund.
In 2010 the Pension Board sued the City for the underfunding that started in 2005. The Pension Board retained PGM and attorney Jeff Goodloe in 2012. Mr. Goodloe filed the operative fourth amended complaint, filed a motion to compel enforcement of the 1996 settlement agreement, and consolidated both cases. The City and the Pension Board filed cross-motions for summary judgment. The trial court found that the City had violated the pension funding statute (40 ILCS 5/4-118), found that the City had violated the settlement agreement, and subsequently entered an injunction that required the City to levy the AAR for the pension fund each year going forward. Additionally, the trial court entered a monetary judgment against the City and in favor of the pension fund in the amount of $12.3 million for past underfunding. The trial court also found that the pension fund was not on the verge of default or imminent bankruptcy—which has been the legal standard to enforce employer pension contributions for Article 3 and 4 pension funds since the Illinois Supreme Court issued its opinion in McNamee v. State in 1996.
The City and the Pension Board filed cross-appeals. On August 4, 2017 the First District Appellate Court issued its opinion. The appellate court affirmed the trial court’s findings that the City violated the pension funding statute, affirmed the injunction, and affirmed the monetary judgment. Importantly, the appellate court also reversed the trial court and held that the pension fund was on the “verge of default” such that the City’s conduct violated Article XIII section 5 of the Illinois Constitution.
The appellate court found that the pension fund was on the verge of default because pension benefits were “…in immediate danger of being diminished.” In making this determination, the appellate court noted that the current firefighters’ contributions were being used to pay current beneficiaries, the appellate court noted the extreme disparity between the amount the pension fund paid each year in benefits and the amount it collected in employer contributions, the appellate court noted that on the current trend the pension fund could be insolvent in 5 years, the appellate court noted the testimony of expert witnesses who concluded the pension fund was on the verge of default, the appellate court noted the City’s dismal financial condition, and the appellate court noted that the City displayed a “complete lack of accountability” and “provided no plan to correct its handling of this pension crisis.” In holding that the pension fund was on the verge of default, the appellate court distinguished its previous holding in Riverdale Police Pension Board v. Village of Riverdale. In Riverdale, although that municipality did not contribute the AAR, it never contributed less than 46 percent of the AAR over an 8-year period. The appellate court noted that the City contributed less than 10 percent of the AAR in six out of nine years. The appellate court held, “[c]ombining the ever-decreasing assets in the Pension Fund, the consistent lack of contributions, and the lack of evidence to support a changing of financial habits by Harvey, this court is convinced the Pension Fund is on the verge of default.” The appellate court described this case as a “…perfect example of a fund on the verge of default.”
The appellate court also affirmed the trial court’s finding that the City violated the pension funding statute without altering existing law that a pension funding statute does not create vested contractual rights to a particular level of funding. Rather, the appellate court held, “…although a municipality does retain discretion in the application of the [Pension] Code, it must do so within the statutory formula determined by the Illinois legislature.” The appellate court noted that the City “…provided absolutely no justification or formula to support the amount of its levy or its contributions in any fiscal year at issue in this case.” The appellate court affirmed the $12.3 million damages calculation and monetary judgment.
The appellate court also affirmed the trial court’s finding that the City violated the 1996 settlement agreement. The appellate court held, “[w]hile there may be no general prohibition on a general levy, the specific levy utilized here, even if it was done as part of a general levy, meant that Harvey was required to remit all funds received which were attributable to that specific levy.” (Emphasis in original).
The appellate court also rejected the City’s affirmative defenses. The appellate court held that section 1-115 of the Pension Code authorized the Pension Board, as a fiduciary, to bring the lawsuit against the City. The appellate court rejected the City’s argument that the settlement agreement was void ab initiobecause the settlement agreement’s terms did not violate any existing law. The appellate court held that the Pension Board did not waive its right to enforce the settlement agreement when it delayed bringing suit particularly because the City’s “…finances were in complete disarray for much of the period at issue.” The appellate court rejected the City’s separation of powers argument and noted “…although the judiciary is cautious when choosing to venture into a legislative branch’s powers, such as taxation, the judiciary will step in to enforce the law when a municipality abuses its discretion under the law. Finally, the appellate court rejected the City’s statute of limitations and laches defenses.
This lawsuit demonstrates that pension-underfunding cases are complicated, lengthy, and difficult. The appellate court has set a high bar for proving that a pension fund is on the verge of default or imminent bankruptcy. Rather, the appellate court’s holding that annual municipal pension funding discretion must be exercised “within the statutory formula developed by the Illinois legislature” offers a more viable argument to enforce the AAR when the municipality is not as dysfunctional as the City of Harvey.
Since the trial court entered its injunction in 2015, the City has so far levied the AAR for the pension fund. Property taxes collected off the specific levy are remitted directly to the pension fund. Last year the City levied $2,648,040 for the pension fund. Additionally, the Pension Board has initiated supplementary proceedings to collect the judgment entered in this case. The City’s petition for rehearing is currently pending in the appellate court.
View appellate court opinion at this link:
Listen to appellate court oral argument at this link:
1