* Press release…
On p. 32 of its new Credit Outlook this week, Moody’s notes last week’s decision by the Illinois comptroller partially denying the City of Harvey’s request for relief from revenue withholding under a state law requiring minimum pension contributions is the latest in a series of events involving Harvey that reinforce strong protections for pensions to the detriment of bondholders, and is thus credit negative for Illinois’ local governments. The comptroller’s response has important implications for other municipalities in the State of Illinois (rated Baa3/negative outlook) struggling to provide services and pay pensions because it clearly prioritizes underfunded pensions over municipal services.
Harvey is structurally insolvent, with an available fund balance of negative $56 million, or negative 199% of revenue, as of the fiscal year that ended April 30, 2017. The city has already racked up numerous general obligation bond defaults, missing two debt service payments in fiscal 2016, six in fiscal 2017 and as of February had missed four in fiscal 2018. Harvey historically has underfunded actuarially determined contributions (ADCs) for its public safety pension plans, contributing very little to its firefighter pension fund from 2009-2013, and even its far higher 2017 contribution fell far below the ADC.
Local pension plans in Illinois can request that the state withhold revenue from a sponsoring municipality if that municipality does not make minimum contributions. Harvey’s public safety pension funds have made such requests, and the state has withheld more than $2 million to date. In protest, Harvey warned that it cannot afford to provide essential public services. The city asserts that it will soon be unable to meet payroll, and last month announced layoffs. The state comptroller’s office has responded that it has no discretion under state law to consider Harvey’s hardship.
Now facing solvency challenges, Harvey’s pension funds have won legal judgments that mandate city funding. Following a host of judicial rulings and appeals over the state’s revenue withholding, including at the Illinois Supreme Court, the state comptroller’s office announced its intention to send $2.3 million of withheld revenue to Harvey’s police pension fund to begin satisfying that judgment.
We estimate that at least 25%, or roughly $5.4 million, of the city’s $21.9 million of budgeted general fund revenue in fiscal 2017 was eligible for withholding under the comptroller’s announced framework. Since the city’s two pension judgments amount to nearly $20 million, it will likely take several years of revenue withholding to retire the obligations unless a court intervenes, a settlement is reached or state law is changed.
Moody’s declaration of “credit positive” or “credit negative” does not connote a rating or outlook change. It is indicative of the impact of a distinct event or development as one of many credit factors affecting the issuer.
* Related…
* Harvey keeps pushing for settlement in face of Illinois pension intercept
- Smitty Irving - Tuesday, May 29, 18 @ 11:27 am:
So, holding people accountable is a “negative” ???
- Board Watcher - Tuesday, May 29, 18 @ 11:40 am:
Mendoza is busy right now trying to figure out a way to blame Rauner for this….
- RNUG - Tuesday, May 29, 18 @ 11:40 am:
== So, holding people accountable is a “negative” ??? ==
No. But taking away cash that could be used to pay bonds is a negative.
Plus from the rating agencies and bondholders standpoint, it sets a bad precedent that pensions get paid ahead of bonds.
Can’t have that happen to the 1.4%. /s
- Roman - Tuesday, May 29, 18 @ 11:52 am:
Mendoza is just following the law.
Ironic that the bond agencies that have beat up the state and local governments for creating debt because of skipped and shorted pension payments are now beating up the state for legally requiring local governments not to skip or short pension payments.
- Trump2020 - Tuesday, May 29, 18 @ 11:55 am:
Comptroller Junk
- Norseman - Tuesday, May 29, 18 @ 12:05 pm:
Ratings agency:
Result desired by the money people = continued attack on pension benefits.
- wordslinger - Tuesday, May 29, 18 @ 12:18 pm:
Moody’s is cool, though, that every Illinois comptroller has, forever, every month socked away 1/12th of the state’s annual debt service on bonds?
Principles are principles, right?
It’s absolutely loopy to project Harvey’s economic and fiscal situation on to every municipality in the state.
- Liandro - Tuesday, May 29, 18 @ 1:54 pm:
“It’s absolutely loopy to project Harvey’s economic and fiscal situation on to every municipality in the state.”
Except that isn’t what is happening. The bond credit rating company is noting that this “solution” potentially weakens the position of bonds. It is a reflection of how muni bonds work across the board.
Or, as they put it, the state’s denial of relief is part of a trend “reinforcing strong protections for pensions to the detriment of bondholders” and “is indicative of the impact of a distinct event or development as one of many credit factors affecting the issuer.”
- Liandro - Tuesday, May 29, 18 @ 1:57 pm:
Don’t take that as a knock on the Comptroller or the state law, btw. There are no “good” solutions for Harvey (and many, many other municipalities), and there hasn’t been for some time. Any “solution” is going to have negative aspects to it at this point.
- Da Big Bad Wolf - Tuesday, May 29, 18 @ 2:06 pm:
A casino for Harvey. Or maybe a military base. The sole municipality for sports gambling. We need to do something.
- Anonymous - Tuesday, May 29, 18 @ 2:08 pm:
Harvey needs a mayor who is a problem solver. The status quo isn’t working.
- Anonymous - Tuesday, May 29, 18 @ 2:10 pm:
==A casino for Harvey. Or maybe a military base. The sole municipality for sports gambling.==
Harvey used to have several strip clubs, er… gentlemen’s clubs.
- wordslinger - Tuesday, May 29, 18 @ 3:22 pm:
–Except that isn’t what is happening. The bond credit rating company is noting that this “solution” potentially weakens the position of bonds. It is a reflection of how muni bonds work across the board.–
No, it’s not. The comptroller is following existing law, withholding revenue sharing because Harvey is not making minimum contributions. There’s no new policy here prompting a ratings action.
Those munis that are making their contributions are getting the same negative outlook.
There’s no new policy here.
- Put the fun in unfunded - Tuesday, May 29, 18 @ 4:23 pm:
RNUG, I don’t have a lot of sympathy for the bond dealers feeding at the trough to enable irresponsible spending, but stiff the bondholders and what happens when you want to do a capital bill? Both pensions and bonds are “promises” that can’t be wished away.
- Da Big Bad Wolf - Tuesday, May 29, 18 @ 5:08 pm:
I think the casino comes first, then the strip clubs. And the restaurants. For people leaving the casino but still don’t want to go home.
- RNUG - Tuesday, May 29, 18 @ 6:06 pm:
== I don’t have a lot of sympathy for the bond dealers feeding at the trough to enable irresponsible spending, but stiff the bondholders and what happens when you want to do a capital bill? Both pensions and bonds are “promises” that can’t be wished away.==
You pay more for your capital bill …
The point is that Bond rating companies had been overly generous for many, many years. After the bankers blew up the entire financial system about 10 years ago, the rating agencies started to get religion. You might even argue they have gone too far to the conservative side.
And, IMHO, the Fed / Obama’s response was the worse possible path. Instead of directly bailing out of the big banks and 2 of the 3 companies, they should have given the money directly to the citizens with a mandate it had to be immediately spent on paying off mortgages, buying new cars, and paying off other consumer credit like credit cards. That would have put cash in the banks also, and solved the d3bt / liquidity problem for most people.
- RNUG - Tuesday, May 29, 18 @ 6:09 pm:
Hit post by accident …
And it would have fueled a run-up in the economy like the pent up demand after WW II. We’d still be riding that wave … but the bankers didn’t want people out of debt, they just wanted the banks bailed out.
- Da Big Bad Wolf - Wednesday, May 30, 18 @ 9:18 am:
RNUG, don’t worry. The opportunity to bail out the banks will happen again, soon.
- Liandro - Wednesday, May 30, 18 @ 11:54 am:
“There’s no new policy here.”
You and I both know that how policy is interpreted and used, and how appeals to it are handled, can have almost as much impact as a completely new policy. That is what the bond company is reacting to. You could argue that they should have done it sooner, sure, but again–everyone is watching the process in action now, and reacting accordingly.