A Cook County Circuit judge has turned control of Harvey’s municipal water system back to the city after more than three years of it being run under the auspices of a court-appointed receiver, but Harvey officials still face a financial challenge in squaring up outstanding debt with its supplier of Lake Michigan water.
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The receiver was approved in August 2017 after Harvey was found in violation of a consent decree meant to guarantee regular water payments to the city of Chicago.
At the time, Harvey was more than $20 million in arrears on its water bills to Chicago and found to be improperly diverting water fund revenues for other city operating expenses.
Judge Anna Loftus noted in her Dec. 18 decision that Harvey, the receiver and Chicago agreed to end the receiver’s tenure by the end of the month.
“The receivership has run its course, and all parties agree the time has come for it to be terminated,” Loftus wrote.
Harvey Mayor Christopher Clark hailed this as “a huge accomplishment,” but said there is still a long way to go to get city finances in order.
Last fall, Harvey hired Chicago-based Meristem Advisors to devise a debt restructuring plan. Clark, who took office in 2019, said negotiating a water bill payment plan with Chicago is a priority.
The 2015 consent decree guaranteed monthly payments to Chicago of $244,000, but Clark said Harvey cannot sustain that.
“My hope is to be able to sit down with the city of Chicago and actually give them an assessment of what we have as far as our income and expenses and hopefully be able to renegotiate a payment structure that Harvey can sustain,” he said Wednesday. “I believe they are willing to because I believe they are reasonable.”
Harvey also supplies Lake Michigan water to neighboring Dixmoor, East Hazel Crest, Hazel Crest, Homewood and Posen, although Homewood is embarking on a project to get a new source of Lake Michigan water.
In his initial assessment of Harvey’s water system following his appointment, receiver Robert Handler reported that Harvey was supplying water to more than 79,000 residential and business customers, including those in the “downstream” communities.
At the time, Handler noted that, on average, 57% of water bought by Harvey from Chicago was billed to those downstream communities.
The receiver said Harvey’s water system generated average annual revenue of $16.5 million and had yearly expenses of about $15.2 million, and Clark said those figures are still in the ballpark.
Water finances ‘in disarray’
Harvey has been buying Lake Michigan water from Chicago since 1917 and began falling behind in payments to Chicago in 2008. Chicago sued in December 2012.
A judgment of $26.3 million against Harvey was entered in November 2014, and a consent decree the following year required the $244,000 monthly installments, according to court documents.
Money generated from Harvey’s water sales were, under the decree, supposed to go into a separate account to pay Chicago. Harvey made regular payments during 2015 but missed several payments in 2016, according to court papers.
Chicago also alleged that millions of dollars were transferred out of the water fund and used for other city expenses. Some money was used to pay bills at jewelry and department stores, Chicago officials alleged.
In January 2017, Harvey was deemed to be in violation of the consent decree, and other communities Harvey sells water to were directed to make their payments directly to Chicago.
The following month, Chicago attorneys asked a receiver be appointed, something the downstream communities also sought.
Cook County Judge Kathleen Pantle, in siding with the Chicago, noted it was “undisputed that Harvey’s water fund finances are in disarray, and are being unlawfully raided by Harvey’s government to pay for non-water related expenses.”
Harvey contested the appointment of a receiver, but a state appellate court ruled against the city in late March 2018.
‘We save money if they go away’
As Harvey continues to pay off debt owed to Chicago, one of its largest downstream water customers, Homewood, is preparing to undertake a multimillion dollar project to get water elsewhere.
From Clark’s standpoint, losing Homewood as a customer can only help Harvey.
He says that more than half the water consumed by the downstream communities goes to Homewood, the largest of the five, and contends Homewood pays less for water than Harvey’s cost of delivering it.
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“Harvey has subsidized them to the tune of $1 million per year,” Clark said. “Them leaving is not a harm to the city. We save money if they go away.”
Homewood has had 10-year renewable water supply contracts with Harvey since 1982, and the current agreement expires at the end of 2022, said Mayor Rich Hofeld. He said that terms, such as how much his community pays, are negotiated.
Still, Homewood began exploring new sources of water a couple of years ago due to rising rates and uncertainty about the ongoing financial condition of Harvey’s water system, he said.
In 2007, the village paid $1.78 per 1,000 gallons, and that rose to $2.96 by 2012 then $4.27 by 2015, although increases the last five years have been nominal. According to Homewood, the village pays $4.51 per 1,000 gallons of water, but the receiver had proposed increasing that to $5.57.
Homewood last year signed a 25-year supply agreement with Hammond, Indiana, and will get Lake Michigan water through a new connection Homewood will build to hook up with Chicago Heights’ water system.
Chicago Heights buys Lake Michigan water from Hammond, which it uses for its own municipal supply and also provides water to Ford Heights, Glenwood, South Chicago Heights and Thornton. Homewood, via Harvey, also supplies lake water to Flossmoor.
Under the agreement with Chicago Heights, Homewood will initially pay $4.05 per 1,000 gallons.
Homewood officials have had some discussions with officials in Flossmoor, East Hazel Crest and Hazel Crest to use Homewood as their water supplier once the new infrastructure is in place.
Clark said he and other city officials are trying to get the city’s finances in better shape in hopes debt holders will be more receptive to a restructuring plan.
“I want to structure in a way we can make sure the bondholders get paid,” he said.
Harvey, already on the ropes financially, has taken an extra hit due to the COVID-19 pandemic.
“We were already in the hole before the pandemic even got here,” the mayor said. “What we are learning to do is how to do more with less. We’re stretching it.”