Chicago Pension Reforms Struck Down by Illinois Supreme Court

March 31, 2016

On March 24, 2016 the Illinois Supreme Court filed its opinion affirming the Cook County Circuit Court’s ruling that the reforms made to the City of Chicago’s Municipal and Laborers’ Pension Funds in Public Act 98-0641 were unconstitutional because they reduced pension benefits in violation of the pension protection clause of the Illinois Constitution. 

 

Background 

Public Act 98-0641, signed into law on June 9, 2014, made changes to pension benefit levels for current retirees and employee members of two of the City of Chicago’s four pension funds, the Municipal and Laborers’ Funds, and increased employee and employer contributions to the funds. Its provisions went into effect on January 1, 2015, even though litigation was filed against the legislation in Cook County Circuit Court at the end of December 2014.

The Illinois Supreme Court announced it would hear oral arguments on the State pension litigation on March 11, 2015. Soon after, the plaintiffs for the Municipal and Laborers’ cases asked for their suits to be stayed pending the Supreme Court’s decision.

Following the Illinois Supreme Court’s decision on May 8, 2015, which found the 2013 State pension reform legislation unconstitutional, the lower court proceeded with the Chicago pension fund lawsuits.

On July 24, 2015, Circuit Court Judge Rita Novak issued her opinion striking down the Chicago pension reform legislation as unconstitutional under the public pension protection clause of the Illinois Constitution. The City of Chicago immediately announced its intention to appeal the case to the Illinois Supreme Court.^[1] In early August, the Illinois Supreme Court agreed to expedite the City of Chicago’s appeal of the Circuit Court’s decision.

The increased employee contributions to the funds since January 1, 2015 were refunded and the City’s increased contributions to the funds were held in escrow, as a result of the ruling. 

You can read more on the Municipal and Laborers’ Pension reforms here, here and here. You can read more on the reforms made to the State of Illinois pension funds here and here.

 

Illinois Supreme Court Ruling

The Illinois Supreme Court was tasked with determining whether Public Act 98-0641 violated the pension protection clause in the Illinois Constitution.

The City of Chicago’s position has long been that the pension reform legislation does not diminish or impair pension benefits, but rather saves the funds from future insolvency resulting in a ‘net benefit’ to participants. The City additionally argued that that the reforms were permissible as the result of a bargained-for exchange agreement negotiated between the City and a majority of the unions representing the members of the Municipal and Laborers’ Funds.

The high court rejected the City’s first argument that the reforms are a net benefit, citing its previous rulings in the Kanerva case dealing with retired state employee healthcare benefits as well as other court rulings. Because members of the funds are already guaranteed their full benefits under the pension protection clause and because legislative pension funding choices are outside the protections of the constitutional pension guarantee, the court rejected the “notion that the promise of solvency can be ‘netted’ against the unconstitutional diminishment of benefits.” The court went on to say that the “fundamental principle here is that determination must be made, if at all, according to contract principles by mutual assent of the members, and not by legislative dictates.”

On the City’s second argument that the reforms were the result of negotiations agreed to between representatives of the City and its labor partners, the high court also rejected that argument and agreed with the circuit court’s ruling, stating in its opinion that “the members of the Funds did not bargain away their constitutional rights in the process.” This is because “the unions were not acting as authorized agents within a collective bargaining process.”

Finally, the City has also argued that it is not legally required to fund the benefits of retirees if the funds become insolvent and thus the funding provisions of the pension reform laws are another benefit conveyed to members. However, the high court provided clarity on that matter by stating that members of the Funds are entitled to receive the benefits they were promised and “not merely to receive whatever happens to remain in the Funds.” How the courts could enforce funding if any of the pension funds were to go insolvent is unclear.

 

Moving Forward

Following the ruling by the Illinois Supreme Court, the Mayor issued a press release stating that the City will continue to work with its labor partners to ensure the future solvency of both funds. The press release went on to say that the City will make its statutorily required pension payments for 2015. This will amount to $180 million.

As a result of the high court’s ruling that overturned the reforms made to the Municipal and Laborers’ Pension Funds, the City will receive short-term budgetary relief of approximately $130 million, which is equivalent to the contributions that would have been made in fiscal years 2015 and 2016. However, the pension funds will face an uncertain future as the overall funded ratios of the two funds will return to pre-reform levels and the funds will again face imminent insolvency if no changes to their funding are made. The Municipal and Laborers’ Pension Funds also released a joint report confirming that without reforms both funds are destined to become insolvent as soon as 2024 for the Municipal Fund and 2028 for the Laborers’ Fund.

Rating agencies have responded to the court’s ruling on the City’s pension reform negatively with Fitch Ratings downgrading the City’s credit two notches to BBB- with a negative outlook, just one notch above junk status. It was also reported that Moody’s issued a statement that the ruling is a credit negative for the City, but did not change its rating or outlook as a result of the court’s decision. Moody’s previously downgraded the City’s credit rating to junk status in May 2015 following the Supreme Court’s ruling on the State’s pension reforms. Both agencies highlighted the central importance of Chicago developing a credible plan for how it will deal with its mounting pension obligations. 

In addition to the challenges the City faces with its Municipal and Laborers’ Funds moving forward, the City is coping with the statutorily required increase in contributions to its Police and Fire Pension Funds. Public Act 96-1495, enacted in December 2010, requires the City to increase funding levels for the Police and Fire Pension Funds by increasing its contributions to the two public safety funds by nearly $550 million in tax year 2015 (payable in 2016) with the goal of bringing the funded ratio of each fund to 90% by the end of 2040. Although Mayor Emanuel supported and the Illinois General Assembly passed Senate Bill 777, which would have reduced the City’s large pension contribution scheduled for tax year 2015 by $220 million, it has not yet been sent to the Governor’s desk for his consideration, leaving the City of Chicago with added budgetary uncertainty. As a result of SB 777 not being signed into law, the City was required to come up with the $220 million through short-term borrowing to meet the statutorily required payment to the two funds.

The Federation will continue to monitor the progress of the funds and any proposed reforms to shore up the finances of those funds.