Nobody involved in the city pension crisis would want it to come to this, I’m sure, and there are plenty of assurances all around that it never will.
But if city pension funds are allowed to continue on their current trajectory and become insolvent, whose responsibility is it to make sure the retirees get paid?
I’ve always assumed the answer is that it’s ultimately the responsibility of the city, and therefore of city taxpayers.
In defending against a lawsuit brought by city workers and retirees over benefit cuts to those covered by the municipal employees and laborers pension funds, lawyers for the Emanuel administration have started casting doubt on that assumption.
Moody’s Investors Service also made reference to this legal uncertainty in a report this week clarifying the reasoning behind its decision to downgrade the city’s bond rating to junk status.
Illinois law defines pension benefit payments as obligations of the pension funds, which are separate legal entities from the city, Moody’s noted.
“But if the pension funds are unable to fulfill these obligations, it is unclear which party will be responsible for paying annuitants,” Moody’s said.
The city’s position is that it would be legally required to make retirement payments to police and firefighters if their pension funds become insolvent, but not those covered by the municipal employees and laborers funds — unless the city’s pension reform law is upheld by the courts.
The General Assembly previously made the city directly responsible for funding police and firefighter pensions under legal changes made in 2010 that also raised the retirement age.
Under the new pension law, the city agreed to accept legal responsibility to guarantee future funding for municipal and laborers pensions in exchange for benefit cuts.
It’s a key part of Mayor Rahm Emanuel’s legal argument that the city pension law preserves pensions and is therefore different from the state legislation recently declared unconstititutional.
“If [city pension reform] goes down, we don’t have any obligation to pay,” a City Hall source familiar with the matter said Tuesday.
Clint Krislov, an attorney for some of the plaintiffs challenging the new pension law, disagrees.
“That is an unfortunate new argument they have made,” Krislov said. “The city had not previously said they might walk away from the funds.”
To be clear, I have not seen anyone from the city use the words “walk away,” but that’s been the definite inference.
Would the Illinois Supreme Court let the city get away with that if they won’t even allow promised benefits to be reduced?
Krislov sure doesn’t think so, and I agree that would seem like the logical conclusion. But you can’t always predict what a court will decide.
The city’s argument would be that it has always met its legal requirements to make contributions to the pension funds.
That may seem surprising, because we keep telling you this problem was largely caused by the city not setting aside enough money each year to fund the future pension promises.
But even when the city paid nothing, as it did with the laborers fund for about a 6-year stretch, it always received legal cover from the Legislature to do so. The chronic underfunding was written right into the law setting forth the funding formula.
Some think the General Assembly could just pass a law forcing the city to directly make the pension payments.
It could, I suppose, but I doubt it would under the current political alignment, unless the city were to agree. And there would be no reason for the city to voluntarily take on that burden unless it got something in return.
From a moral standpoint, I don’t think there’s any doubt the pension obligation is the city’s responsibility. That doesn’t always have anything to do with it.
This is not just doomsday spitballing.
The municipal and laborers funds are projected to go belly up in 10 years to 12 years without a revenue infusion. The firefighters fund, which is in worse shape, could be insolvent in half that time.
At the point the city has to start directly paying its retirees, taking away money needed to provide city services, nobody will be doubting this pension crisis is real and affects everyone.