Chicago’s Plan to Change Pension Benefits Ruled Unconstitutional

NY Times - A judge in Chicago ruled on Friday that a plan to change city workers’ pensions was unconstitutional. The case is being closely watched for its effect on the city’s uncertain finances.

The judge, Rita M. Novak of the Cook County Circuit Court, said she was bound by the Illinois Supreme Court’s recent decision that state lawmakers are constitutionally barred from reducing public workers’ pensions.

“This principle is particularly compelling where the Supreme Court’s decision is so recent, deals with such closely parallel issues and provides crystal-clear direction on the proper interpretation of the law,” Judge Novak wrote. The Constitution of Illinois provides that public pensions “shall not be diminished or impaired.”

Pension costs in many American states and cities are growing much faster than the money available to pay them, causing a painful squeeze. Officials who try to restore balance by reducing pensions in some way are almost always sued; outcomes of these lawsuits vary widely from state to state.

Some of the worst problems have been brewing for years in Illinois, particularly in Chicago, where the city’s pension contributions have long been set artificially low by lawmakers in Springfield, the state capital. With more and more city workers now retiring, a $20 billion deficit has materialized, and Friday’s ruling is seen as a setback to Mayor Rahm Emanuel’s efforts to close this gap and rescue Chicago’s credit rating.

“While we are disappointed by the trial court’s ruling, we have always recognized that this matter will ultimately be resolved by the Illinois Supreme Court,” said Chicago’s legal counsel, Stephen Patton, in a statement. “We now look forward to having our arguments heard there.”

But Roberta Lynch of the American Federation of State, County and Municipal Employees called Judge Novak’s ruling “a win for all Chicago.”

“All city residents can be reassured that the Constitution — our state’s highest law — means what it says and will be respected, while city employees and retirees can be assured that their modest retirement income is protected,” said Ms. Lynch, the executive director of Afscme’s Council 31 in Chicago.

The city’s attorneys had tried to convince Judge Novak that the State Supreme Court’s decision, issued in May, did not apply to the pension litigation in Chicago, because Chicago’s pension changes had been agreed to through collective bargaining before legislators were asked to approve them.

In addition, Chicago said its pension overhaul would provide “massive net benefits” to workers if allowed to proceed. That was because the two pension funds at issue — one for laborers and one for general city workers — were heading toward certain insolvency. An insolvent system would be able to pay retirees only about 30 percent of their benefits. The cuts before the court were less drastic, and in combination with other changes, were supposed to leave the workers and retirees better off.

In May, Moody’s Investors Service lowered the city’s credit rating to junk status, saying that rising pension costs were “placing significant strain on the city’s financial operations,” and Mr. Emanuel appeared to have limited legal tools for dealing with them.

Deep downgrades can increase a municipality’s borrowing costs substantially. Mr. Emanuel called the downgrade “irresponsible” at the time and hastened to describe his efforts to balance the interests of organized labor, the city’s taxpayers and the investors who buy its bonds.

“I do not believe the taxpayers have $1 billion-plus in their pocket ready to put into a pension and bear the entire burden,” he said on the news program “Chicago Tonight” in May. “Which is why I said to labor, ‘If you come forward, I’m ready to step up on the issue of revenue, which no mayor has done before. But you have to be part of the solution.’ ”

The negotiated pension changes that were voided by the court on Friday called for reducing the cost-of-living increases that retirees received each year, increasing workers’ mandatory contributions to the funds and strengthening the city’s pledge to step up its own contributions.

Of the 31 unions whose members were to be affected by the changes, 28 had approved it. But the others sued, along with a number of individual workers and retirees. Other unions, representing teachers and nurses, among others, asserted “associational standing” in the litigation.

The litigation was then suspended because of events in Springfield, where lawmakers were also struggling with the state’s pension costs. In 2013, at the prodding of the last governor, Patrick Quinn, lawmakers enacted changes meant to stabilize the pension system, which covers public workers everywhere in Illinois except Chicago. The state did not engage in collective bargaining beforehand, and unions promptly sued, citing the State Constitution.

In May, the Supreme Court of Illinois ruled unanimously that the Legislature had acted unconstitutionally. Even if the state had a fiscal crisis, the court said, lawmakers could not lawfully address it by breaking promises made to public workers and retirees.

A few days later, the Chicago cases resumed, and Mr. Patton urged Judge Novak to work quickly. “We’ve had two downgrades since we were last in front of you, exactly what we feared would happen,” he told her at a hearing in May. “Given the financial circumstances of the city right now, the sooner we know, the better.”

In a hearing this month, the city’s lawyers argued that the proposed changes to the pension system did not “diminish or impair” the benefits. Rather, they said, the benefits would be diminished without the changes, because the pension system would then become insolvent and retirees’ benefits would be drastically cut.

The unions argued, among other things, that Chicago’s claims that it had collectively bargained the package of pension changes were invalid and that the city’s pledge to provide better funding for the pensions in the future was not credible.

City officials have said that they hope their appeal will be decided by the Illinois Supreme Court by the end of this year. Even then, Chicago will not be out of the woods, though, because of severe imbalances in its pension funds for police and firefighters, as well as the fund that Chicago Public Schools operates for teachers.