Chicago's Pension Law Struck Down

by | July 24, 2015

By Hal Dardick

A Cook County judge on Friday overturned the city's changes to two pension funds, declaring them "unconstitutional and void."

In her ruling, Judge Rita Novak dismissed city arguments that the changes to the two pension funds amounted to a "net benefit" for retired workers because the city was guaranteeing the funds would be there.

The state constitution, she wrote in her 35-page opinion, "removed diminishing benefits as a means of attaining pension stability." The city, under the state constitution, already is obligated to ensure pension funding because pension promises are "a contractual relationship between the employer and employee," the judge said.

Novak also rejected the city's contention that because at least 27 of 31 affected unions agreed to the changes, it was a "bargained-for" change.

"There is no evidence that, in reaching an agreement with the city, the union officials followed union rules and bylaws in such a way as to bind their members," she wrote. "Nor is there evidence that the membership voted on the agreement. ... Additionally, there is no showing that the unions could have acted as agents of retired members while at the same time acting as representatives of active employees."

The ruling represents a setback for Mayor Rahm Emanuel and could end up costing city taxpayers hundreds of millions of dollars more because government employees would get their full benefits restored in two retirement funds and have to pay less toward their retirement.

At issue is a 2014 state law Emanuel pushed through the legislature that aimed at shoring up the financially imperiled pension funds by reducing cost-of-living increases and requiring workers to kick in more money. The city also would pay more into the retirement funds, and Emanuel came up with some of that money by raising 911 phone fees by $1.40 a month.

The worker and laborer funds are short about $9.5 billion of what's needed to meet future obligations and are at risk of going broke within 13 years.

Retired workers and unions sued, citing a clause in the Illinois Constitution that holds that government pension membership "shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired."

In May, the Illinois Supreme Court pointed to that clause in unanimously overturning similar changes made to four state pension funds.

Anders Lindall, spokesman for the American Federation of State, County and Municipal Employees Council 31, one of the unions that sued to overturn the law, called on the city not to appeal Friday's ruling.

"We can know, as Chicagoans, that the highest law of our state, the constitution, has meaning, and its integrity has been upheld today -- that a pension is a promise, that the life savings of public service workers will not be diminished," he said.

"We would urge the city not to waste further time and taxpayer dollars on an appeal," he said. "Judge Novak was very clear and unequivocal today, and the Supreme Court was just as unequivocal in the spring, that the constitution means exactly what it says and is without exception."

Instead, the city should come up with the money to pay full benefits, he said.

"The problem with pensions is a funding problem, it's not a benefit problem," Lindall said, adding that the average annual pension payment for a city worker is $32,000. "City employees have always paid their share."

But city officials made it clear they intend to appeal to the state Supreme Court.

"We have always recognized that this matter will ultimately be resolved by the Illinois Supreme Court," Corporation Counsel Stephen Patton, the top city attorney, said in a statement. "We now look forward to having our arguments heard there.

"We continue to strongly believe that the City's pension reform legislation, unlike the State legislation held unconstitutional this past spring, does not diminish or impair pension benefits, but rather preserves and protects them. This law not only rescues the municipal and laborer pension funds from certain insolvency, but ensures that, over time, they will be fully funded and the 61,000 affected City workers and retirees will receive the pensions they were promised," Patton said.

While Emanuel is defending the laborers and city workers case, he's already acknowledged the new legal landscape created by the state Supreme Court ruling in his proposed fix for the police and fire pension funds. His plan would not diminish benefits for police officers and firefighters. Instead, the city would stretch out the payment schedule so that initial increases in taxpayer contributions would be reduced. Police and fire pension funds are short about $10 billion and stand to go broke in less than a decade.

The approach also would provide the mayor with some short-term budget relief as the city considers new pension funding sources that could include a significant property tax increase. Lawmakers approved the city pension bill May 31 but have yet to send it to Republican Gov. Bruce Rauner amid the state government stalemate.

The stakes are high in all of this: The city's overall financial woes led one debt rating agency to downgrade the city's creditworthiness to junk status.

"It is essential that the city officials develop a comprehensive plan, both in the short term and in the long term, for the city's finances, regardless of the circuit ruling, because the city faces an over $1 billion budget deficit, the worst credit rating in the United States and the risk of further downgrade if they don't develop a comprehensive plan for stabilizing finances," said Laurence Msall, president of the Civic Federation, a nonpartisan budget watchdog group that supports the pension changes.

The court loss Friday on the laborers and municipal workers pension case actually gives Emanuel a small bit of budget breathing room heading into 2016. The city would no longer have to increase its payments into those two pension funds. That means the $50 million freed up by the 911 phone fee hike could be spent elsewhere.

In addition, Emanuel no longer would have to find an extra $50 million a year in each of the next four years for the two pension funds. But that would be kicking the can down the road, as the pension shortfalls would continue to grow and it would become far more costly in the long run to restore their financial health.

With the law overturned, workers and laborers, meanwhile, could see a savings. As part of the changes, city workers and laborers this year began making increased contributions to the funds -- money they could be due back with the judge's decision.

For that reason, unions sought to block the law from being enacted pending the outcome of the case, but they were unsuccessful. "That's why we sought to have the law enjoined, so if it were overturned, it would not be so hard to unscramble the egg," Lindall said before Friday's ruling.

In closing arguments two weeks ago, Patton, the city's top attorney, contended that instead of diminishing or impairing benefits, the changes made to the worker and laborer funds ensure for the first time that the funds won't go bust. That's because the law guarantees adequate city funding, something that wasn't in the previous law, he said.

"Quite the opposite of diminishing or impairing benefits, it preserves and protects them," Patton told Novak in his closing arguments.

Patton also said at least 27 of 31 affected city unions backed the new law, showing that it was a bargained-for exchange that would abide by contract law under the theory of "consideration" that was cited by the Supreme Court in a footnote in its ruling. "There would be nothing that would justify throwing out this statute that saves these pension funds from insolvency," he said.

Clint Krislov, a lawyer challenging the law on behalf of the retired city workers, dismissed the city's contention that the new law was a "net benefit" to workers and retirees because it saved the funds. "This is the Chicken Little defense," Krislov said. "It says the sky is falling, so we're going to do what we're going to do."

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