Chicago pension reform ruled unconstitutional

The Illinois Supreme Court ruled Thursday that an earlier pension reform law for the $4.6 billion Chicago Municipal Employees' Annuity & Benefit Fund and the $1.35 billion Chicago Laborers' Annuity & Benefit Fund is unconstitutional, upholding the decision reached in a Cook County Circuit Court in July.

The law, signed by then-Gov. Pat Quinn on June 9, 2014, and which took effect Jan. 1, 2015, raised employee and employer contributions and reduced retiree cost-of-living adjustments for participants in the two plans.

Siding with active and retired city workers who argued the law violated the state's constitutional clause that pension benefits “shall not be diminished or impaired,” Cook County Circuit Court Judge Rita M. Novak ruled in July that the pension reform law was unconstitutional.

Chicago appealed Ms. Novak's ruling to the state Supreme Court shortly after.

In oral arguments before the Supreme Court in November, Stephen Patton, the city's corporation counsel, said the law “avoids this looming disaster for the (Chicago Municipal Employees' Annuity & Benefit Fund and the Chicago Laborers' Annuity & Benefit Fund) and their participants by massively increasing the city's contributions and imposing a new obligation that the city must pay each year whatever amount the funds' actuaries determine necessary to ensure that the funds are fully funded and that all pensions will be paid.”

The Supreme Court rejected that argument on Thursday. “The fact that some of (the law's) provisions are directed at improved funding cannot overcome the fact that constitutional rights of employees and retirees would be violated,” said Justice Mary Jane Theis, writing for the court. “The pension protection clause does not guarantee any particular method of funding, but, rather, guarantees the right to be paid.”

The municipal employees and laborers pension funds, with roughly $7 billion and $720 million in unfunded liabilities, respectively, are projected to become insolvent in 2026 and 2029.

The lawsuit did not address participants in the other two city pension funds — the $2.6 billion Chicago Policemen's Annuity & Benefit Fund and $1 billion Chicago Firemen's Annuity & Benefit Fund.

Chicago faces roughly $20 billion in unfunded liabilities across its four pension funds. Moody's Investors Service Inc. downgraded Chicago's credit rating to junk in May, citing pension concerns.

Jim Mohler, executive director of the municipal employees' fund, could not immediately be reached for comment.

Meaghan Kilroy writes for Pensions & Investments, a sister publication of Business Insurance.