Hog-tied: Illinois state law not equipped to address local governments’ pension problems

Avenues for state oversight for cities with financial difficulties have limited utility in the face of massive pension debt and have almost never been invoked since Springfield passed them into law in 1990.

Cities, towns, and villages across Illinois are struggling with unfunded pension liabilities, even as property taxes have grown six times faster than household incomes. Some are even struggling to meet payroll and making cuts to basic services.

But the options for municipalities struggling with their finances are slim. Two receivership laws – laws allowing an independent “receiver” to take over the management of a city’s finances – passed in 1990. Illinois’ Financially Distressed City Law and the Local Government Financial Planning and Supervision Act, or LGFPSA, provide for state supervision for municipalities that cannot pay their debts or meet their financial obligations.¹

But these laws cannot address the most serious problems plaguing Illinois local governments. Even if local governments want to give up control, qualifying for aid under these laws is difficult. And what aid the state provides will do nothing to solve the No. 1 problem facing many Illinois cities: massive public pension debt.

Illinois’ receivership laws for financially distressed local governments

Since these laws’ passage in 1990, almost no local governments have sought the intervention they provide.

The Financially Distressed City Law allows for the creation of a financial advisory authority for a distressed home rule municipality, which is a city, village or unincorporated township with more than 25,000 residents. The financial advisory authority has the power to step in and approve loans budgets and contracts, and otherwise oversee the city’s finances. The LGFPSA, meanwhile, allows for a smaller unit of local government in a financial emergency to petition the governor to create a financial planning commission to help manage that local government’s finances. The LGFSPA allows a stay of debt collections (not a discharge of debt) owed to Illinois state or local governments or agencies only, and the commission may approve or withhold any state funding going to the distressed municipality.

Both laws allow the municipality’s advisory authority or commission to specifically request aid from the Illinois Finance Authority in the form of loans financed by debt obligations issued by the authority.

An Illinois Policy Institute search for local governments that have petitioned for state aid under the LGFSPA found none, and so far, only East St. Louis, Illinois, has taken advantage of the Financially Distressed City Law.

East St. Louis requested certification as a financially distressed city in 1990, and remained under that law’s oversight for the next 23 years, according to Reuters. The city was able to negotiate changes in some of its obligations to creditors such as the IRS and to access bond financing, but did not emerge free of fiscal problems or debt.

During its oversight, East St. Louis filed a lawsuit against its advisory authority when the authority attempted to impose its own budget on the city, after rejecting city-proposed budgets. East St. Louis won its case, but this demonstrates the difficulties and limited nature of the relief available under the Financially Distressed City Law.

In fact, more Illinois communities have filed for Chapter 9 bankruptcy without the required state authorization than have taken advantage of Illinois’ laws to aid distressed municipalities.

In 2003, the village of Brooklyn, Illinois, declared bankruptcy partially to restructure settlement payments from lawsuits alleging police misconduct and financial mismanagement, according to a report by the Better Government Association. In 2005, the village of Alorton, Illinois, declared bankruptcy in the wake of a judgment against the city in favor of a police shooting victim.

Those villages were probably able to slip by because no creditors objected to their bankruptcy filings. However, in 2009, the village of Washington Park, Illinois, tried to get away with its own Chapter 9 filing, but a federal bankruptcy judge dismissed the petition in 2010 for lack of state authorization, according to The Associated Press. It is unlikely Illinois municipalities would be able to quietly file for Chapter 9 bankruptcy without state authorization again.

State oversight laws are powerless to fix municipalities’ most challenging problems

Given that many cities face financial troubles – and now garnishment of state tax revenues for unpaid pension debt – why have so few sought oversight from the state? This could be due in part to reluctance to give up local control, but there are also practical reasons that laws designed to protect struggling communities are rarely invoked in Illinois.

First, these laws have strict requirements. For a home rule municipality to even qualify for designation by the General Assembly as a “financially distressed city” under the Financially Distressed City Law, a city must be in the top 5 percent of home rule municipalities in terms of aggregate property tax rates and in the bottom 5 percent of home rule municipalities in per capita tax yield. Under these criteria, it is not clear what municipalities qualify for help.

Only units of government with populations under 25,000 can take advantage of the Local Government Financial Planning and Supervision Act, and it requires that the local government be in continuing default in principal and interest payments on debt obligations for more than 180 days; fail to make payment of over 20 percent of all payroll employees for more than 30 days; and that the unit of government be insolvent, i.e. the local government is generally not paying or unable to pay its debts as they come due.

But another reason municipalities have not turned to these laws most likely stems from the fact that municipalities face financial troubles, such as unaffordable employee pension obligations, that can’t be solved through state oversight of their budgets. The powers of the oversight bodies created under these laws are limited. For example, under the Financially Distressed City Law, the financial advisory authority has no power to impair contracts or obligations of the city and may only approve or reject a multiyear employment or collective bargaining agreement during the first year of the contract. Commissions established under the LGFPSA are even more limited.

And no amount of budget tinkering can solve the problem of increasingly unsustainable pension debt. The state’s hands are tied because of the Illinois Supreme Court’s interpretation of the Illinois Constitution’s pension protection clause. Without a constitutional amendment or access to Chapter 9 bankruptcy, the nearly $10 billion in suburban and downstate pension debt is untouchable.

If the state can’t do anything to solve the most pressing issue struggling municipalities face, why would they go through the disruption of asking the state to take over their finances?

Until the Illinois Constitution is amended to allow pension reform, current state oversight laws will offer little hope to struggling Illinois communities

¹The General Assembly also provided financial oversight specifically for the Chicago Board of Education with the creation of the School Financial Authority in 1980 (105 ILCS 5/34A). The School Finance Authority was dissolved in 2010.