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Board of Trustees of City of Harvey Firefighters' Pension Fund v. The City of Harvey

Court of Appeals of Illinois, First District, Fifth Division

August 4, 2017

BOARD OF TRUSTEES OF THE CITY OF HARVEY FIREFIGHTERS' PENSION FUND, Plaintiff-Appellee/Cross-Appellant,
v.
THE CITY OF HARVEY, Defendant-Appellant/Cross-Appellee.

         Appeal from the Circuit Court of Cook County. No. 10 CH 53364 The Honorable Mary L. Mikva, Judge Presiding.

          PRESIDING JUSTICE GORDON delivered the judgment of the court, with opinion. Justice Reyes concurred in the judgment and opinion. Justice Lampkin specially concurred, with opinion.

          OPINION

          GORDON PRESIDING JUSTICE.

         ¶ 1 Defendant City of Harvey (Harvey) is a municipality with a population of approximately 25, 000 residents, located south of the city of Chicago. Plaintiff, the Board of Trustees of the City of Harvey Firefighters' Pension Fund (Pension Board), is an administrative body created pursuant to section 4-121 of the Illinois Pension Code (Code) (40 ILCS 5/4-121 (West 2014)) to oversee and manage the City of Harvey Firefighters' Pension Fund (Pension Fund). 40 ILCS 5/4-120 to 4-129 (West 2014). The Pension Board filed suit, alleging that Harvey has underfunded the Pension Fund and breached a 1996 settlement agreement in which Harvey agreed to make certain contributions to the Pension Fund. The Pension Board sought a declaratory judgment, a writ of mandamus, injunctive relief, and an order compelling enforcement of the 1966 settlement agreement. After both parties filed motions for summary judgment, the trial court granted the Pension Board's motion for a declaratory judgment, injunctive relief, and enforcement of the 1996 settlement agreement and denied summary judgment for a writ of mandamus. The trial court found that Harvey violated the pension statute but was not on the verge of default or imminent bankruptcy. The trial court denied Harvey's motion for summary judgment. Pursuant to this ruling, the trial court assessed damages against Harvey for $15, 071, 089.15. The injunction that was issued required Harvey to approve a line-item property tax levy specifically for the Pension Fund, which would be sufficient to meet the annual actuarial requirements set forth in the Code. Harvey filed a notice of appeal, and the Pension Board filed a notice of cross-appeal.

         ¶ 2 The parties argue on appeal about (1) whether the trial court correctly determined that Harvey breached the 1996 settlement agreement; (2) whether the trial court correctly calculated the damages; (3) whether the trial court correctly rejected Harvey's affirmative defenses of separation of powers and laches; (4) whether the trial court erred in making a finding of violations of the Code and requiring certain monies to be paid into the Pension Fund, without first finding that Harvey was on the verge of default or imminent bankruptcy; and (5) whether the trial court erred in finding that Harvey is not on the verge of default or imminent bankruptcy.

         ¶ 3 BACKGROUND

         ¶ 4 I. THE 1993 COMPLAINT AND 1996 SETTLEMENT AGREEMENT

         ¶ 5 On February 17, 1993, the Pension Board filed a complaint for mandamus, declaratory judgment and accounting, alleging that Harvey had failed to adequately fund the Pension Fund between 1988 and 1994 and claiming that not all of the taxes levied and collected were deposited into the Pension Fund as required by the Code. 40 ILCS 5/4-120 to 4-129 (West 2014).

         ¶ 6 On August 22, 1996, the parties entered into a settlement agreement that required Harvey to "repay the amount due and owing to the [Pension Fund] *** which is approximately $912, 652.00 over a five (5) year period including [Harvey's] annual tax levy an amount in addition to the amount of levy requirements minus the allocation of personal property replacement taxes, recommended by the Illinois Department of Insurance."

         ¶ 7 Further, Harvey agreed that, "in the future, " it would "ensure property taxes levied or personal property replacement taxes received on behalf of the [Pension Fund], which are assessed, collected and remitted to the City of Harvey by the Cook County Treasurer's Office, shall be paid to the [Pension Fund] within 30 days of receipt by [Harvey] and not used by [Harvey] for other corporate purposes." In addition, the parties agreed that the trial court retained jurisdiction over the matter to enforce the settlement agreement, providing: "The Court hereby expressly retains jurisdiction of this matter for the purposes of enforcing all of the terms and provisions of this Agreed Settlement Order."

         ¶ 8 II. 2010 COMPLAINT

         ¶ 9 On December 17, 2010, 15 years after the execution of the settlement agreement, the Pension Board filed a complaint stemming from Harvey's alleged violations of section 4-118 of the Code (40 ILCS 5/4-118 (West 2010)), commencing in the fiscal year 2005 and continuing through fiscal year 2010. All of the evidence in this case concerned facts that ended with the fiscal year 2014.

         ¶ 10 The Pension Board filed an amended complaint on September 29, 2011, which added individual defendants Eric Kellogg, the mayor of Harvey; Maggie Britton, the Harvey comptroller in 2010; and Charles Givines, Joseph Whittington, Daryle Crudup, Michael Bowens, Donald Nesbit, and Keith Price, members of Harvey's city council.

         ¶ 11 On November 18, 2011, Harvey moved to strike the individual defendants from the Pension Board's first amended complaint. Following the filing of this motion, the Pension Board filed a second amended complaint on June 25, 2012, which asserted a count for breach of fiduciary duty against the individual defendants. On July 25, 2012, Harvey filed a combined section 2-615 and 2-619 motion to dismiss the second amended complaint with prejudice or, alternatively, a section 2-615 motion to strike the individual defendants from the second amended complaint. 735 ILCS 5/2-615(a), 2-619(a)(9) (West 2010).

         ¶ 12 On October 24, 2012, while Harvey's motions were pending, the Pension Board filed an emergency motion to compel Harvey to levy a tax in order to fund in "an amount at least equal to the amount determined by an actuary for 2011 in the amount of $1, 558, 762.00." On October 26, 2012, Harvey filed a motion to strike the Pension Board's emergency motion, arguing that the emergency motion sought the same remedy that the Pension Board seeks in its second amended complaint. On October 29, 2012, the trial court denied the Pension Board's emergency motion.

         ¶ 13 On November 5, 2012, the Pension Board filed its third amended complaint, adding claims for mandamus and injunctive relief.

         ¶ 14 III. PLAINTIFF'S FOURTH AMENDED COMPLAINT

         ¶ 15 On December 14, 2012, the Pension Board filed its fourth amended complaint, which is the subject complaint in this appeal. Its four counts seek (1) a declaratory judgment that Harvey must annually levy a tax to contribute to the Pension Fund and pay money damages, (2) a writ of mandamus compelling Harvey to levy an annual tax for the Pension Fund or otherwise annually contribute to the Pension Fund an amount that fulfills the annual actuarial requirement, (3) injunctive relief ordering Harvey to levy an annual tax for the Pension Fund or otherwise annually contribute to the Pension Fund an amount that meets the annual actuarial requirement and to pay money damages, and (4) an order that finds that Harvey breached the 1996 settlement agreement and an order compelling enforcement of that agreement.

         ¶ 16 On January 15, 2013, Harvey filed a combined section 2-615 and 2-619 motion to dismiss the Pension Board's fourth amended complaint. 735 ILCS 5/2-615(a), 2-619(a)(9), 2-619.1 (West 2012). Harvey's motion addressed each count of the Pension Boards' fourth amended complaint as follows.

         ¶ 17 First, Harvey argues that an action for declaratory judgment is inappropriate because declaratory judgment is a vehicle used to address a "controversy one step sooner than normal after a dispute has arisen, but before steps are taken which would give rise to a claim for damages or other relief." Harvey also argues that declaratory judgment would be inadequate because it cannot alter actions that the parties have already taken. Second, Harvey argues that a writ of mandamus cannot force a legislative body to perform a discretionary act; therefore, a writ is unable to "compel [Harvey] to make municipal pension fund contributions that meet the annual actuarial requirement[.]" Third, Harvey argues that the Pension Fund had not sustained any damages that could not be adequately remedied with money damages; therefore, injunctive relief is an inapplicable remedy. Finally, Harvey argues that the trial court has no jurisdiction to enforce the 1996 settlement agreement because the agreement explicitly agreed that the original court in the 1993 action retained jurisdiction to enforce the agreement. That original court in 1993 was Calendar 12 of the Chancery Division in the circuit court of Cook County.[1]

         ¶ 18 In addition to its section 2-615 arguments, Harvey also moved to dismiss pursuant to section 2-619(a)(9), claiming that the suit was barred by governmental immunity. 735 ILCS 5/2-615(a), 2-619(a)(9) (West 2010). Harvey argues that the Pension Board's claims must fail because "(a) [Harvey] is not liable for its council members' negligence in performing governmental functions; and (b) [Harvey] is not liable under the Local Governmental and Governmental Employees Tort Immunity Act. [Tort Immunity Act] [745 ILCS 10/8-101(a) (West 2010).]"

         ¶ 19 The trial court heard argument on May 24, 2013, and denied Harvey's motion to dismiss count I, for declaratory judgment; count II, for a writ of mandamus; and count III, for injunctive relief. However, the trial court granted Harvey's motion to dismiss count IV, for breach of the 1996 settlement agreement, due to lack of jurisdiction, and cited in support the provision of the settlement agreement allowing only the 1996 court to maintain jurisdiction over enforcement of the agreement. However, after granting the motion to dismiss count IV, the trial court allowed the Pension Board leave to re-plead before the original trial court that had approved the 1996 settlement agreement (hereinafter, the 1996 court) and that matter was transferred to the 1996 court.

         ¶ 20 IV. MOTIONS TO COMPEL ENFORCEMENT AND CONSOLIDATE

         ¶ 21 On December 11, 2013, the trial court consolidated this case with the earlier case and transferred the motion to compel enforcement of the 1996 settlement agreement to Calendar 12.

         ¶ 22 Following consolidation, both parties filed motions for summary judgment on October 14, 2014, with the Calendar 6 Court, which are the subject of this appeal. 735 ILCS 5/2-1005 (West 2012).

         ¶ 23 V. PENSION BOARD'S MOTION FOR SUMMARY JUDGMENT

         ¶ 24 The motions for summary judgment are described in depth with year-by-year financial detail, which is necessary to understand the magnitude of the funding problem. In the Pension Board's motion for summary judgment, the Pension Board argues that Harvey must be required to adequately contribute to the Pension Fund because the Pension Fund is on the verge of default or imminent bankruptcy and will become insolvent without judicial intervention.

         ¶ 25 A. OVERVIEW

         ¶ 26 To support its claims, the Pension Board attached to its motion for summary judgment 16 exhibits, including the complete transcripts of the discovery depositions of the following individuals: (1) Gloria Morningstar, the Harvey City Treasurer; (2) Maggie Britton, a CPA for Alli Financial and a Harvey City Assistant Comptroller; (3) Joseph Letke, a CPA and the Harvey City Comptroller; (4) Sandor Goldstein, an actuary; (5) Calene Zabinski, the Pension Fund's auditor; (6) Jamie Wilkey, a CPA with Lauterbach & Amen; (7) James Ritchie, the Pension Fund's CPA; (8) Todd Schroeder; the Pension Fund's actuary; (9) Jon Willhite, the Pension Fund's financial consultant; (10) Daniel Mumpher, the Director of the Local Government Division for the State Comptroller; and (11) Scott Brandt, an Illinois Department of Insurance representative.

         ¶ 27 In addition, the Pension Board attached, as exhibits, the Illinois Department of Insurance notice of noncompliance issued to Harvey, dated February 20, 2013, and the Securities and Exchange Commission complaint filed against Harvey and Joseph Letke on June 24, 2014.

         ¶ 28 B. MISMANAGEMENT CLAIM

         ¶ 29 In its motion for summary judgment, the Pension Board argues that the Pension Fund contributions are being mismanaged and underfunded by Harvey and the Pension Fund is being underfunded. In support of this assertion, the Pension Board presented financial information regarding the Pension Fund from fiscal year 2005 through fiscal year 2014. First, the Pension Board presented the annual actuarial requirement as calculated by three different actuaries. Section 4-118 of the Code explains what an annual actuarial requirement is:

"[T]he annual actuarial requirements of the pension fund are equal to (1) the normal cost of the pension fund, or 17.5% of the salaries and wages to be paid to firefighters for the year involved, whichever is greater, plus (2) an annual amount sufficient to bring the total assets of the pension fund up to 90% of the total actuarial liabilities of the pension fund by the end of municipal fiscal year 2040, as annually updated and determined by an enrolled actuary ***." 40 ILCS 5/4-118(a) (West 2012).

         ¶ 30 In its motion, the Pension Board presented the calculations of three separate actuaries concerning the annual actuarial requirements: Tim Sharpe;[2] Todd Schroeder; and Scott Brandt, who represents the Illinois Department of Insurance. Second, the Pension Board attached the deposition transcript of Maggie Britton, who is the Harvey comptroller, and who testified about the monies that Harvey appropriated for the Pension Fund and how the appropriation ordinance was determined. Further, the Pension Board attached Britton's deposition exhibits, which set forth the amount appropriated by way of the ordinance and the amount sought through a tax levy. Lastly, the Pension Board attached the depositions of Jamie Wilkey, a CPA, and Calene Zabinski, the Pension Fund auditor. Through these depositions and exhibits, the Pension Board established the amount that Harvey actually contributed to the Pension Fund for each fiscal year.

         ¶ 31 The Pension Board presented various exhibits to provide the financial information for fiscal years 2005 through 2014:

Year

Annual Actuarial Requirement

Levied for Pension Fund

Paid to Pension Fund

2005

$876, 692 (Brandt) $880, 632 (Sharpe)

$0

$9, 885

2006

$980, 024 (Brandt) $945, 580 (Sharpe)

$0

$38, 304

2007

$1, 060, 727 (Brandt) $1, 061, 219 (Sharpe)

$480, 632

$615, 407

2008

$1, 140, 932 (Brandt) $1, 077, 837 (Sharpe)

$1, 061, 219

$771, 471

2009

$1, 294, 791 (Brandt)

$1, 061, 219

$18, 181

2010

$1, 574, 792 (Brandt)

$350, 000

$5, 143

2011

$1, 611, 369 (Brandt) $1, 558, 762 (Sharpe)

$0

$0

2012

$1, 611, 369

$1, 558, 762

$0

$0

2013

$1, 531, 760 (Schroeder)

$0

$0

2014

$2, 070, 500 (Schroeder)

$600, 000

$600, 000

         ¶ 32 In the motion for summary judgment, the Pension Board cited information provided in the deposition of Sandor Goldstein, an actuary, who was retained by Harvey to calculate how much money Harvey owed the Pension Fund. Goldstein testified that he calculated the contribution deficiency using the difference between the annual actuarial valuations and the actual amount Harvey contributed to the Pension Fund between fiscal year 2005 and fiscal year 2013. Goldstein opined that the total contribution deficiency up to the end of 2013 was $8, 077, 602. Additionally, he calculated that the accumulated contribution deficiency, which is the loss of revenue to the Pension Fund because Harvey did not properly contribute to the Pension Fund, to be $10, 009, 403. Basically, Goldstein calculated that Harvey "deprived the Pension Fund of $8 million in actual contributions and another $2 million in actual investment gains on those contributions." Lastly, the Pension Board cited the deposition of Todd Schroeder, who calculated that the Pension Fund should have approximately $34 million in assets as of 2014 rather than the $11, 180, 962 in assets that the Pension Fund actually had. As a result, the Pension Fund was deficient at the end of 2013 by approximately $23 million.

         ¶ 33 C. ON THE VERGE OF DEFAULT OR IMMINENT BANKRUPTCY

         ¶ 34 In its motion for summary judgment, the Pension Board argues that the Pension Fund is on the verge of default or imminent bankruptcy. The following deposition testimonies provided the evidence to determine whether the Pension Fund is on the verge of default or imminent bankruptcy.

         ¶ 35 (1) Gloria Morningstar

         ¶ 36 The deposition of Gloria Morningstar, Harvey's treasurer, was attached to the motion for summary judgment. Morningstar testified that, as treasurer for Harvey, she oversees its fiscal monies, revenue, and disbursements and is responsible for preparing the annual financial report submitted to the Illinois Comptroller's Office, as required by statute. She testified that she had not completed the annual financial reports since the fiscal year of 2008 because she never received the 2008 audit, which Harvey is yet to complete and which is necessary to complete the report.

         ¶ 37 Morningstar testified that Harvey budgeted $458, 400 in 2005 for retirement and pension funds, but Harvey contributed only $9, 885, while the employees contributed $204, 149 to the Pension Fund. However, the Pension Fund paid out $1, 398, 003 in benefits for that year.

         ¶ 38 Morningstar testified that Harvey's total revenue for fiscal year 2006 was $20, 446, 917, and that it contributed $38, 304 to the Pension Fund, while the employees contributed $245, 146, and the Pension Fund paid $1, 439, 262 out in benefits.

         ¶ 39 For fiscal year 2007, Morningstar testified that Harvey collected $19, 328, 100 in revenue and contributed $565, 407 to the Pension Fund, while employees contributed $245, 555. However, the Pension Fund paid out $1, 582, 325 in benefits. Morningstar explained that Harvey's tax levy ordinance for fiscal year 2007 showed that Harvey had budgeted $1, 180, 632 for the Pension Fund, but Morningstar was unable to explain why the amount budgeted for the Pension Fund at the beginning of the year was greater than the amount budgeted in the fiscal year end audit.

         ¶ 40 For fiscal year 2008, Morningstar testified that Harvey collected $19, 585, 131 in total revenue and that the audit report showed that the annual required contribution to the Pension Fund was $1, 077, 837. However, the actual contribution made by Harvey was only $468, 365.

         ¶ 41 Morningstar testified that Harvey does have a statutory requirement to contribute to the Pension Fund and that Harvey has not contributed as required by statute since 2005. At the time of her deposition on February 28, 2014, Morningstar testified that Harvey had not made any contributions to the Pension Fund since 2009.

         ¶ 42 (2) Maggie Britton

         ¶ 43 Maggie Britton, a certified public accountant for Alli Financial and one of two comptrollers for Harvey, provided deposition testimony that, as comptroller, her duties include financial management, preparation of the annual budget, internal audits, and tracking expenditures and revenue. Britton testified that she performs the day-to-day comptroller duties, while Joseph Letke is the official comptroller for Harvey, which means that she assists in the preparation of the annual financial reports, which are submitted to the Illinois Comptroller's Office. Britton testified that Harvey has not been completing the required audits, so they are unable to complete the annual financial reports. Britton testified that Harvey had not undergone an audit for fiscal years 2010, 2011, 2012, or 2013.

         ¶ 44 Britton next testified regarding personal property replacement taxes, which are taxes disbursed by the State of Illinois to the municipalities eight times per year. Britton testified that a portion of the personal property replacement taxes is statutorily required to be contributed to the Pension Fund. Britton testified that Harvey received $805, 674 in personal property replacement taxes for 2007; $888, 081 for 2008; $778, 539 for 2009; $649, 436.17 2010; and $797, 445.69 for 2011. However, Harvey had not contributed any personal property replacement taxes to the Pension Fund during these years. Additionally, Britton testified that Harvey did not levy any money for either the fire or police pension funds for 2005 through 2010.

         ¶ 45 Britton testified that Harvey appropriated $300, 000 in 2005, $300, 000 in 2006, $1, 180, 632 in 2007, $197, 000 in 2008, $1, 161, 219 in 2009, $1, 161, 219 in 2010, $0 in 2011, $480, 000 in 2011, $450, 000 in 2013, and $1, 781, 542 in 2014 for the Pension Fund.

         ¶ 46 Britton testified that she knows there is a statute that requires contributions to be transmitted to the Pension Fund every year and that Harvey should fund the Pension Fund, based on the most recent actuarial calculations that provide the required amount of funding. Specifically, Britton testified that "based on the rate of return for investments and employee contributions, the [Pension Fund] could be facing a shortfall in [fewer than 10 years]."

         ¶ 47 (3) Joseph Letke

         ¶ 48 During his deposition, Joseph Letke, the official comptroller for Harvey starting in 2003, invoked his Fifth Amendment privilege against self-incrimination 178 times and refused to answer questions regarding (1) fraudulent and misleading bond offerings, (2) a developer who collected bond proceedings from Harvey then fled to India, (3) the accusation that Letke collected fees from both Harvey and the developer, who fled to India, (4) why each Harvey alderman had an $80, 000 unmonitored expense account, (5) why Harvey paid an alderman's son $325 an hour for snow removal, and (6) why Harvey paid the mayor's son $88, 000 to develop a social media website.

         ¶ 49 Additionally, the Pension Board attached to its motion for summary judgment a complaint filed by the Securities and Exchange Commission (SEC) against both Harvey and Letke. The complaint alleges:

"[a] scheme by [Harvey] and Joseph T. Letke to misuse proceeds raised from investors in municipal bonds issued by Harvey. From 2008 to present, Harvey and its Comptroller, Letke, have engaged in a scheme to divert bond proceeds for improper purposes, including undisclosed payments to Letke."

         Further, the complaint alleges that Harvey and Letke offered fraudulent bond offerings for $6 million in 2008, $3 million in 2009, and $3 million in 2010.

         ¶ 50 The complaint alleges that these bond offerings were to provide funding for a "Holiday Inn Hotel in Harvey" and:

"Thus, it was important to bond investors that money raised from the bond offerings, consistent with the stated purpose, was actually used to fund the hotel development, since the amount of funds to repay the bonds derived from tax revenues would be materially affected by the funding and progress of the Hotel Redevelopment Project."

         However, unknown to the bond investors and contrary to the representations made by Harvey and Letke, "Harvey officials improperly diverted at least $1.7 million of bond proceeds from these offerings into the general operation accounts of Harvey to pay [Harvey's] operation costs, including payroll. Letke *** also received approximately $269, 000 in undisclosed payments derived from bond proceeds[.]"

         ¶ 51 Due to these alleged misappropriations and misrepresentations, the SEC sought (1) money damages against Letke, (2) a temporary restraining order prohibiting Harvey from offering or selling its own municipal securities, (3) a permanent injunction prohibiting Harvey from selling municipal securities for five years, unless an independent consultant reviews and approves of its municipal security disclose policies and procedures, and (4) a permanent injunction prohibiting Letke from participating in any capacity in a municipal securities offering.

         ¶ 52 (4) Jon Willhite

         ¶ 53 Jon Willhite, the Pension Fund's financial consultant since the 1980's, testified in his deposition regarding a calculation table showing his calculations for lost revenue between fiscal years 2005 and 2013. This table is a calculation for lost revenue based on the recommended tax levy as opposed to the collected tax levy. The table appears as follows:

Fiscal Year

Required Contribution

Contribution Received

Investment Return

Shortfall Lost Revenue

Cumulative

2005

$880, 632

$9, 885

4.18%

$870, 747

$888, 963.37

$888, 963

2006

$945, 580

$38, 304

7.80%

$907, 276

$942, 661.93

$1, 900, 969

2007

$1, 061, 219

$615, 407

10.17%

$445, 812

$468, 476.94

$2, 562, 735

2008

$1, 140, 932

$771, 471

3.06%

$369, 461

$375, 115.17

$3, 016, 289

2009

$1, 294, 791

$18, 181

-12.06%

$1, 276, 610

$1, 199, 637.40

$3, 852, 195

2010

$1, 574, 792

$5, 134

18.15%

$1, 569, 658

$1, 712, 113.49

$6, 263, 527

2011

$1, 611, 369

$0

9.65%

$1, 611, 369

$1, 689, 086.91

$8, 556, 806

2012

$1, 611, 369

$0

-2.05%

$1, 611, 369

$1, 594, 812.58

$9, 975, 780

2013

$1, 531, 760

$0

7.07%

$1, 531, 760

$1, 585, 940.72

$12, 267, 438

         ¶ 54 Willhite testified that he created this document to show the data that he examined in calculating the cumulative loss in revenue to the Pension Fund. Based on his calculations, Harvey's lack of contributions to the Pension Fund has resulted in a cumulative lost revenue of $12, 267, 438 from 2005 to 2013. Willhite testified that the cumulative total is the total lost revenue plus the investment returns.

         ¶ 55 Willhite was asked, based on his experience as the Pension Fund's financial consultant, whether the Pension Fund is on the verge of default or imminent bankruptcy. Willhite responded by testifying:

"we took on the plan in 2009 *** and the assets were at 17 million and some change. We've had a positive annual rate of return in the 7s, I believe, over that time frame compounding. I would have to go back and get the actual number, but it's been a fairly decent return. And [the Pension Fund has] gone from over 17 million to approximately $11.1 million as of the close two days ago.
So that would tell me that if you were to take the monthly-or the monthly outflows of over 300, 000 a month going out and continue to expand upon that and just take that annual number of $1.2 million and divide that by the 11 million, yeah there's going to be a time when there's no money left in that plan; and it's shorter than the life expectancy of the retirees."

         ¶ 56 Willhite further opined: "[a]t their current condition and the rate of money that's going out they will reach a time when there will be no money left in the [Pension Fund] as we know it today." Willhite further opined that if the tax levy is not reinstated, then the Pension Fund is going to be in "dire, dire problems." Willhite continued his opinion by stating that the Pension Fund is being forced to sell assets to pay the beneficiaries. Willhite testified that of all the pension funds he works with, Harvey's Pension Fund is the worst funded.

         ¶ 57 Willhite opined that the Pension Fund would be insolvent in seven to nine years. He based this opinion on the fact that, in 2009, the Pension Fund had over $17 million in assets; however, it lost over $7 million in assets since that year without adequate contributions from Harvey. Even more concerning to Willhite is that the Pension Fund has had a 9.75 percent return over that same time frame, which, normally, would indicate a positive increase in monies in the fund. However, that was not the case in Harvey because of inadequate contributions by Harvey.

         ¶ 58 (5) Sandor Goldstein

         ¶ 59 Sandor Goldstein is an actuary who was hired by Harvey to review the calculations by Jon Willhite, the actuary for the Pension Fund. Goldstein testified as follows at his deposition.

         ¶ 60 In reviewing the pertinent documentation, Goldstein opined that Willhite's calculations were deficient as to the total loss revenue for the Pension Fund due to the lack of contributions from Harvey. Goldstein testified:

"Well, it was deficient because he basically just went to each year's actuarial valuation and considered the annual requirement for that year versus the employer contribution for that year and added it all up over the full period from 2005 to 2013, and that doesn't take into account that if there's-if [Harvey] had actually made those contributions in the early years, then those contributions would have had some investment earnings and would have added to the assets, and therefore the contributions in the later years would have been less, so in a way, when we look at the deficiency in contributions in one year, we've already taken it into account, but if we-and that affects the required contribution in the future year, and if you don't make that contribution, the required contribution in the future year will be less also; so you're counting the effect of these deficiencies in contributions twice, first in the year when it's not made and then also in the later years where you're contributing more, so I feel that once you've recorded a deficiency in contributions you need to add it into the assets to calculate future year deficiencies."

         ¶ 61 Goldstein testified that, in his calculations for accumulated contribution deficiency, he would assume that Harvey had actually contributed the annual actuarial requirement and that the Pension Fund had the money invested at a particular rate of return for each fiscal year. Based on this method of calculation, Goldstein provided the following chart, which lays out all of his calculations:

Fiscal Year

Adjusted Annual Actuarial Requirements

Employer Contribution

Contribution Deficiency

Rate of Return

Accumulated Contribution Deficiency

2005

876, 692

9, 885

866, 807

4.3381%

885, 608

2006

857, 500

38, 304

819, 196

8.0961%

1, 809, 666

2007

990, 302

615, 407

374, 895

10.4075%

2, 392, 410

2008

1, 042, 696

771, 471

271, 225

3.1250%

2, 742, 636

2009

1, 179, 421

18, 181

1, 161, 240

-12.6001%

3, 485, 142

2010

1, 423, 897

5, 143

1, 418, 754

19.2365%

5, 710, 775

2011

1, 190, 734

0

1, 190, 734

10.1914%

7, 544, 193

2012

864, 407

0

864, 407

-2.1699%

8, 235, 520

2013

1, 110, 344

0

1, 110, 344

7.5482%

10, 009, 403

Total

9, 535, 993

1, 458, 391

8, 077, 602

         ¶ 62 Based on his accumulated contribution deficiency calculations, Goldstein opined that if Harvey had been contributing pursuant to the requirements of the Code, that the Pension Fund would have an additional $10, 009, 403 in assets, for a total of approximately $22 million on May 1, 2012.

         ¶ 63 (6) Calene Zabinski

         ¶ 64 Calene Zabinski, a CPA who works as a finance director and treasurer for various towns and municipalities across the state, was hired to perform the year-end audit of the Pension Fund for 2008 through 2013. As a result of conducting these audits, Zabinski testified regarding the assets, annual actuarial requirement calculations, and the percentage of the annual actuarial requirement Harvey had contributed. Additionally, Zabinski used that information to establish the Pension Fund's net change in assets and the percent it was funded.

Year

Annual Actuarial Requirement (AAR)

Harvey Contribution

% of AAR Harvey contributed

Net Change in Assets ()

% Funded

2008

$1, 077, 837

$771, 471

71.58%

-$185, 866

59.16%

2009

$1, 294, 791

$18, 181

1.4%

-$3, 619, 875

50.79%

2010

$1, 574, 792

$5, 143

0.33%

$955, 176

38.28%

2011

$1, 611, 369

$0

0.0%

-$156, 474

40.46%

2012

N/A

$0

0.0%

-$1, 860, 149

N/A

2013

$2, 036, 497

$0

0.0%

-$704, 363

34.68%

         ¶ 65 Zabinski testified that, although it is rare for a municipality to have a fully funded pension fund, she is concerned regarding the continued underfunding of the Pension Fund in Harvey. She testified that "the continued underfunding, coupled with that increase in the rate of pay higher than the actuarial assumption, eventually will get to the point where [Harvey] is going to have to pay for the pensioners." In other words, the underfunding will cause the dissipation of the Pension Fund's assets which will result in the fund having no assets, thereby requiring Harvey itself to pay the pension benefits.

         ¶ 66 (7) Jamie Wilkey

         ¶ 67 Jamie Wilkey, an accountant with Lauterbach & Amen, an accounting firm that specializes in the accounting of government entities, testified that his firm was hired to perform an audit of the Pension Fund for fiscal years 2005, 2006, and 2007. She testified that there were 113 plan members in the Harvey firefighter's pension fund as of 2004, with 49 active plan members and 64 retirees and beneficiaries.

         ¶ 68 Wilkey testified that the Pension Fund had $16, 699, 170 in assets as of April 30, 2005, that Harvey contributed $9, 885 to the Pension Fund for that same year, and that the Pension Fund paid out $1, 398, 003 in benefits for that year. Harvey was required to contribute 12.2% of the Personal Property Replacement Tax (PPRT), but did not do so.

         ¶ 69 Based on the 2005 annual audit report, Wilkey testified that the Pension Fund, as of fiscal year 2005, was 63.87% funded. She testified that the category entitled "annual pension cost" is the number "that reflects the annual required contribution adjusted for the interest on the outstanding net pension obligation as well as adjusted for the actuary's calculation of retiring the unfunded portion of the liability as well." For fiscal year 2005, Wilkey testified that the annual pension costs were $823, 021 and that Harvey's contribution of $9, 885 to the Pension Fund accounted for only 1.20% of the annual pension cost for 2005. There were 47 active plan members and 71 retirees and beneficiaries drawing off the Harvey firefighter's pension fund as of April 30, 2005.

         ¶ 70 Wilkey testified that the Pension Fund had $16, 782, 216 in assets as of April 30, 2006, and paid out $1, 585, 940 in benefits and refunds, while Harvey contributed only $38, 304. Using these numbers, Wilkey opined that the Pension Fund was 59.31% funded. Although Harvey contributed $38, 304 to the Pension Fund, the contribution accounted for only 3.91% of the annual required contribution. As of April 30, 2006, there were 50 active plan members and 66 retirees and beneficiaries; the percent funded of the firefighters' pension fund was 57.82 percent for the 2006 year.

         ¶ 71 Wilkey testified that the Pension Fund had $17, 715, 906 in assets as of April 30, 2007. For this same year, Harvey contributed $615, 407 to the Pension Fund, and the Pension Fund paid out $1, 582, 325 in benefits and refunds. Additionally, the Pension Fund was 57.8% funded, and Harvey contributed 58.02% of the annual pension costs. Further, after examining the annual financial report for fiscal year 2009, she testified that the net pension obligation for Harvey was $4, 539, 179, and Harvey contributed only $18, 181.

         ¶ 72 Wilkey testified that personal property replacement taxes are revenue transmitted to cities within Illinois, which then contribute 12.2% of these taxes to the cities' pension funds. Wilkey opined that Harvey would owe the Pension Fund $125, 773.33 in personal property replacement taxes as of the time of her deposition on February 28, 2014.

         ¶ 73 (8) James Ritchie

         ¶ 74 James Ritchie, a CPA and client manager for Lauterbach & Amen, who worked directly with the Pension Fund, testified to the Pension Fund's financial condition and was concerned for its financial viability. He testified:

"With statutorily required increases in benefits being paid out as well as the expenses and then the lack of municipal funding that is coming in, it looks that the assets are slowly being depleted to pay out benefits as required by statute. Without municipal funding I would say, in an estimation, the [Pension Fund] will begin to have difficulty paying out benefits by the end of this decade."

         ¶ 75 Richie testified that the lack of cash assets or investments that are available for the payment of benefits, combined with the increases in the cost of living, is going to create problems in paying out benefits. Ritchie testified that, in his opinion, the Pension Fund is on the verge of going insolvent and "has approximately five years before that's a very real possibility, of being completely insolvent."

         ¶ 76 Based on his review of the fund's statement of net position ending December 31, 2013, Ritchie testified that Harvey has collected $469, 637.06 on behalf of the Pension Fund, but has not remitted any of it into the Pension Fund. Ritchie reviewed financial statements from April 30, 2007, through April 30, 2013, and calculated the total amount of money that Harvey had failed to contribute to the Pension Fund between fiscal years 2005 and 2013 as approximately $10, 190, 000. However, Ritchie did not account for the loss of investment opportunity in his calculations.

         ¶ 77 (9) Todd Schroeder

         ¶ 78 Todd Schroeder, an actuary with Lauterbach & Amen, was hired to conduct the actuarial valuation for the Pension Fund for 2012 and 2013. Lauterbach & Amen then assigned this task to Schroeder, who testified about what a contribution of zero dollars would do to a pension fund:

"Contribution of zero dollars would increase the unfunded liability of a pension fund. If you look at the current-the prior year recommended contribution, whatever that dollar figure was, versus a contribution of zero, that difference is what's called unexpected unfunded accrued liability that comes in in the next year. So that unexpected unfunded liability adds to whatever unfunded liability already existed from last year to this year that we already knew was there."

         Schroeder further explained that a municipality that continues to make no contribution to a pension fund would result in an increase of the annual required contribution going forward.

         ¶ 79 Schroeder explained why municipalities should contribute the annual actuarial requirement every year:

"The idea behind contributing the annual actuarial requirement each year is that you can-to some extent you can manage the increase in cost over time. So if you set up, for example, an actuarial requirement that's going to increase at four-and-a-half or five percent per year, then you have some predictability as to those contributions if those contributions are being made over time. If those contributions are not made, then you have much more volatility and you see more rapid increases in the contribution calculations and annual actuarial requirements over time."

         Putting these ideas together, Schroeder, when asked whether Harvey's failure to contribute at least the minimum annual actuarial requirement to the Pension Fund was concerning to him, testified:

"Yes. *** One thing that jumps out is that right now the cash flow out greatly exceeds the cash flow that's coming in. The benefit payments that are being paid out of the [Pension Fund] are close to 20 percent of the [Pension Fund's] assets. So the dollars that are coming in from employees and investment income is not enough to offset that, so we're seeing a declining asset base each year."

         ¶ 80 (10) Daniel Mumpher

         ¶ 81 Daniel Mumpher, the Director of Local Government in the Illinois Comptroller's Office, testified that he is in charge of managing the reporting process of local governments throughout the State of Illinois. This includes the intake of annual financial reports, annual audits, and tax increment reports. Mumpher testified that municipalities in Illinois are required to submit annual financial reports to his office within six months of the end of their respective fiscal years.

         ¶ 82 Mumpher testified that Harvey filed its annual financial report for 2005 on July 31, 2006, its annual financial report for 2006 on July 6, 2007, its annual financial report for 2007 on April 8, 2008, and its annual financial report for 2008 on November 15, 2011. He futher testified that Harvey's annual financial reports for 2009, 2010, 2011, and 2012 were all filed on November 1, 2013. ...


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