The fat lady has been singing about Chicago’s plan to save two of four city employee pension funds ever since the Illinois Supreme Court overturned state pension reforms, but Mayor Rahm Emanuel chose to ignore it.
Now, the mayor has no choice but to face the music.
Cook County Court Judge Rita Novak on Friday overturned the city reforms to the cheers of retired city employees who’ve been paying more and receiving less since Jan. 1.
Novak cited the “crystal-clear direction” provided by the Illinois Supreme Court and the high court’s reading of the Illinois Constitution: Membership in a government employee pension system “shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”
“Here, as in the case before the Supreme Court, ‘There is simply no way that the annuity reduction provisions … can be reconciled with the rights and protections established by the people of Illinois when they ratified the Illinois Constitution of 1970 and its pension protection clause,’ ” Novak wrote.
The deal that Emanuel painstakingly negotiated with scores of union leaders raised employee contributions by 29 percent — from 8.5 percent currently to 11 percent by 2019 — and ended compounded cost-of-living adjustments for retirees ineligible for Social Security that have been a driving force behind the city’s pension crisis.
The city started collecting the higher payments on Jan. 1.
Emanuel had argued that the Chicago pension reforms were fundamentally different than the state reforms imposed “arbitrarily.”
His corporation counsel Stephen Patton further claimed that the city’s commitment to “preserve and protect” the two funds amounted to a “massive net benefit.”
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But, Novak concluded that the “net benefit” theory “does not survive scrutiny” because it’s based on “several premises that are wholly inconsistent with constitutional teachings.”
“Pension benefits cannot be netted against funding schemes, regardless of any salutary outcomes they may have. To do so would render the rights guaranteed by the pension protection clause illusory. Such a result is contrary to the pension protection clause its purpose and the Supreme Court’s interpretations of it,” Novak wrote.
“It disregards the settled distinction between pension benefits, which are constitutionally protected, and funding choices, which are not. … It fails to account for the fact that each of the ‘benefits’ that are ‘netted’ against the constitutionally protected right to pension benefits are subject to change at any time. … The General Assembly is not free to diminish benefits even if offering increased financial stability.”
Novak also shot down the city’s claim that 28 of 31 unions agreed to the changes.
“The contention that labor unions, undisputedly acting outside the sphere of collective bargaining, may bind all members of the funds ignores the individual constitutional rights” of retirees, she wrote.
“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 as true agents. 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.”
Patton said the city plans to immediately appeal Novak’s ruling directly to the Illinois Supreme Court in hopes the case will heard by December.
Early next week, Emanuel also plans to seek a stay pending appeal to keep the higher contributions and benefit cuts in effect.
Although Novak shot down the city’s central arguments, Patton was unwilling to give up the ghost. He’s still holding out hope that the Supreme Court will find the Chicago reforms are “fundamentally different” from the state version.
“In the state’s case, all it did was take rights away. … It wasn’t even disputed that it violated the pension clause. The issue there was whether there was a sovereign powers exception that would excuse that violation,” Patton said.
“In our case, it’s indisputable that participants are better off with this legislation than they would be without it. Instead of impairing and diminishing pension benefits, it saves these funds from insolvency and ensures that pensions that have been promised will be paid.”
Patton noted that, if the city wins its appeal, Chicago’s annual contribution to the two funds will quadruple over five years — to $650 million. If the city loses, the city’s contribution will revert back to what it was last year: $177 million, he said.
“If this legislation gets overturned, we’re back to the old law and things continue as they were. These funds go insolvent in 10 and 14 years respectively. They’ll run out of money, and pensions will not be paid,” he said.
The negative ruling for the city was widely expected.
Initially, the decision will actually improve Chicago’s shaky finances. Emanuel will be off the hook to find $250 million in additional revenue over five years to honor the commitment to stabilize the Municipal Employees and Laborers Pension Funds.
But in the long run, Chicago taxpayers will be forced to pay hundreds of millions of dollars more to save the two pension funds because employees and retirees won’t be meeting them half way.
Moody’s Investors Service was so certain that Emanuel’s city reforms would go down in flames, it didn’t wait for Novak’s ruling.
When the state reforms were overturned in mid-May, Moody’s dropped Chicago’s bond rating two more notches — to junk status. Taxpayers have been paying the price ever since in the form of hundreds of millions of dollars in increased interest and penalties.
On Friday, Standard & Poor’s warned of the same.
“Ultimately, the loss of this case means more hurdles for the city in its attempt to address its growing pension liabilities. We will likely lower our [general obligation] rating within the next six months if the city fails to incorporate pension contributions in a structurally balanced manner,” S&P wrote.
“The loss at the circuit court level should spur the city to consider alternatives. In our view, the ruling forces the city to identify a solution that does not rely on pension reform to manage the budget demands of its pension liabilities in the long-run — a particular challenge given Illinois’ state statutes governing pensions. We expect that the next six months will show how serious the city is about implementing both immediate and far-reaching plans to address the structural cracks in its budget, including creating its own pension solution. … We expect city management to consider contingency plans for addressing its liability regardless of the ultimate outcome” of an appeal.
Without the reforms, Patton argued that the city could find itself unable to pay full benefits to retired city workers and that both pension systems could go broke.
But, Novak called that argument “fundamentally at odds with the Supreme Court’s teachings.”
“When the Supreme Court defined the rights guaranteed by the pension protection clause, it did so with reference to mandating ‘a contractual relationship between the employer and the employee’ and ‘creating an enforceable obligation to pay the benefits,’” Novak wrote.
“Contrary to the city’s argument, it is not the Pension Code that creates the contractual relationship. Rather, if the state or municipal employer creates a pension system, the contractual relationship that is mandated derives from the Constitution and so does the ‘enforceable obligation’ to pay the benefits.”
Earlier this week, Chicago aldermen said they were preparing for the worst and wracking their brains to come up with new ways to raise revenue and cut costs.
On Friday, Ald. Pat O’Connor (40th), Emanuel’s City Council floor leader, failed to return repeated phone calls and text messages.
