Justices’ questions signal bad news for Emanuel’s pension fund deal
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The fat lady has been singing about Mayor Rahm Emanuel’s plan to save two of four city employee pension funds ever since the Illinois Supreme Court overturned state pension reforms in May.
The music got louder in July, when a Circuit Court judge overturned the mayor’s plan to stave off insolvency at the Municipal Employees and Laborers pension funds citing the high court’s “crystal-clear direction” and its reading of a constitutional guarantee that pension benefits “shall not be diminished or impaired.”
On Tuesday, that political music was downright deafening.
During oral arguments on the city’s appeal, several Illinois Supreme Court justices made it clear through their questioning that they do not buy the city’s central arguments: that Chicago reforms painstakingly negotiated are different than state reforms imposed “arbitrarily” and that the city’s commitment to “preserve and protect” the two funds amounted to a “massive net benefit.”
“This court has often recognized that the framers [of the Illinois Constitution] were very clear that this pension protection clause would not control funding. Rather, the purpose of the clause was to ensure public employees receive their promised benefits,” said Supreme Court Justice Mary Jane Theis.
“You point us to the statute that was adopted before the Constitution and you argue that, in fact, there has never been an obligation to pay for those benefits. How do you reconcile those very different ideas?”
Corporation Counsel Stephen Patton countered, “I didn’t say there was not an obligation to pay for the benefits. The question is, who’s on the hook to pay for those benefits?…Under the pension contract here, that obligation to pay was limited to the funds. What this act does is it not only specifies the who, but the what. And for the first time, it creates a back-stop that, yes, the city is responsible for paying those benefits — not just the fund. And it is responsible for doing so through an actuarial funding obligation.”
Theis pressed on.
“You’re saying that the constitutional guarantee that promised benefits will be paid is limited by whatever amount there is in the pension fund and, if the pension fund runs out of money, that guarantee no longer applies?” she asked the corporation counsel.
Patton replied, “No. Not necessarily. It depends on the particular pension contract. This court has held time and time again that the pension clause doesn’t create the terms of the pension contract. That’s for the General Assembly to do.”
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.
On Tuesday, Patton noted that Chicago’s annual contribution to the two funds facing insolvency in 10 and 13 years respectively will quadruple over five years.
“It’s why 27 of 31 unions that we negotiated with for two-and-a-half years stepped up with us to try to solve this problem. These folks are better off. They will have a pension fund. In just the first few years, our contributions are going to increase from $177 million in 2014 to more than $650 million and keep going up from there. This is a huge financial obligation,” he said.
“All of that money is going to be pouring into these funds earning a return to ensure that, when these folks retire, it won’t just have an empty promise. They will have a fund with billions of dollars in it that will pay their benefits.”
Justice Bob Thomas was not impressed. He asked Patton what the “overwhelming benefit” was to retirees and how it compared to, “what would seem to be an overwhelming benefit in the Constitution that says the pension funds can’t be diminished or impaired.”
“You talk quite a bit about the agreement between the city and the unions. But, you would agree we’re dealing with a statute — not a collective bargaining agreement, right?” Thomas said.
“Any agreement between the city and the unions is simply part of the history of how the statute came to be.”
Thomas added, “From our standpoint, if the statute is clear and unambiguous on its face and if we believe … how the pension benefits were diminished, why would this court even consider the act’s history?”
As for the insolvency threat, Thomas said: “Let’s follow through with your 10-to-13 years. So, there’s no money in there. Are the pensioners any less entitled to what they were promised?”
John Shapiro, an attorney representing retired city workers, poked giant holes in the city’s argument that the deal that forced retirees to pay more and get less amounted to a “net benefit.”
“The question is whether pension diminishments coupled with new funding can shield those diminishments from the pension protection clause. And the answer clearly is no. Setting aside money to pay what is already a constitutional guarantee is not a benefit new or net. Funding provisions cannot justify pension benefit reductions in Illinois,” Shapiro said.
“The funding mechanism for employer contributions simply has not matched known fund obligations. Now that the result of that disconnect is intolerable, they just don’t want to pay for the benefits. But, that’s precisely what the pension protection clause precludes. This act is little more than an attempt to end-run the court’s recent confirmation that the police power cannot be used to justify pension diminishment.”
Plaintiffs’ attorney Clint Krislov agreed that the “net benefit theory” was a “re-jiggering” of the police powers theory shot down in the state case.
“The argument is now, `We haven’t funded these. We have allowed them to get to the point of maybe insolvency over the next ten years and, because of what we’ve done, the sky is falling,’” Krislov said.
“We’ve created a situation where the guaranteed benefits might not be paid. So here’s what we’re going to do. We’re going to now say, ‘Here’s how we’re going to fund it, but you have to reduce your benefits.’”
The pointed questioning was not unexpected. The Illinois Supreme Court is widely expected to rule against the city. Anything less than a clearcut victory for retirees would be a huge upset.
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 the lower court 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.