Judge: Pension fund can’t claim Harvey, Illinois’ federal ARPA aid

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A state judge refused to block distribution of Harvey, Illinois’ share of American Rescue Plan Act federal coronavirus aid relief funds after rejecting a pension fund’s claim to the money.

The financially stressed Chicago suburb, which has battled over the last decade with its public safety pension funds, Chicago, and bondholders over its obligations, settled a legal dispute in 2018 with its police and firefighters’ pension funds over past due payments. The settlement gives the funds a share of various funding that flows through the state government.

The firefighters’ fund recently sued Harvey to stake a claim to the ARPA money, arguing it is subject to the 10% claim on city tax and aid funds that are sent directly to the pension fund under the 2018 settlement. The fund asked the court to enjoin Comptroller Susana Mendoza, whose office manages the state’s pension intercept program, from distributing any funds until the case was argued.

“The intent of Congress was clear that any fiscal recovery funds should not be or could not be deposited into any pension fund,” said Harvey’s attorney, Robert Fioretti.

Cook County Circuit Court Judge Raymond W. Mitchell, who presided over the case leading to the settlement agreement, shot down the temporary restraining order request in an opinion distributed Friday after concluding the ARPA dollars aren’t subject to the intercept and that U.S. Treasury guidance bars pension deposits.

“First, the federal statute providing for the coronavirus relief funds expressly prohibits those funds from being used to pay pension liabilities,” Mitchell wrote in his opinion.

Mitchell rejected the pension fund’s argument that the actual language in the ARPA legislation governing smaller municipalities like Harvey does not ban the state from forwarding funds that would be deposited into a local government pension system. The TRO request argued that the lack of such language “shows that Congress intended to treat the two types of funds differently.”

Mitchell disagreed, saying that the provisions that govern distribution must be read together in the ARP legislation signed by President Biden in March providing $350 billion for local, state and tribal governments.

“These provisions manifest a congressional intent to prohibit any of the coronavirus relief funds from being used to pay state and local pension liabilities,” Mitchell wrote. “This reading of the state finds further support in the United States Treasury’s interim final rule which interprets the statute as prohibiting state and local entities from using coronavirus relief funds to pay pension liabilities.”

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 guidance 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 those deposits are directly linked to the pandemic.

Mitchell also rejected the firefighters’ argument that ARPA funds paid to the state and allocable to Harvey constitute “state funds” that are subject to interception by the firefighters board under the parties’ settlement.

“The coronavirus relief funds at issue here are not state funds. They are not the product of tax revenue that the state collects and then disperses to municipalities. These are federal funds made available to state and local governments to meet the challenges of the coronavirus pandemic,” Mitchell wrote. “These federal funds were plainly beyond the contemplation of the parties when they entered into their settlement agreement in 2018.”

The firefighters’ fund has not yet decided its next step including whether it will continue pursuing the case in the absence of a temporary restraining order, said the fund’s lawyer Andrew Schwartz, Schwartz & Kanyock LLC. The comptroller is represented by the attorney general’s office.

“I believe the decision was correct in terms of what we the city of Harvey advocated,” said Harvey’s attorney Robert Fioretti of Roth Fioretti LLC. “The intent of Congress was clear that any fiscal recovery funds should not be or could not be deposited into any pension fund. This should end any and all questions of future litigation whether here in this state or elsewhere.”

A group of Harvey bondholders and the police fund are also parties to the 2018 consent decree but neither sought a piece of the American Relief Plan funding.

Fioretti during the May hearing told the court federal input was needed to interpret the statutes and he planned to contact the U.S. Attorney given the release of Treasury guidance language that also bans the use of ARP aid for judgments, settlements, or consent decrees.

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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