Ill. Supreme Court overturns city pension reforms
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Beleaguered Chicago taxpayers face short-term gain but long-term excruciating pain now that the Illinois Supreme Court has shot down down Mayor Rahm Emanuel’s plan to save two of four city employee pension funds.
“These modifications to pension benefits unquestionably diminish the value of the retirement annuities the members…were promised when they joined the pension system. Accordingly, based on the plain language of the Act, these annuity-reducing provisions contravene the pension protection clause’s absolute prohibition against diminishment of pension benefits and exceed the General Assembly’s authority,” the ruling states.
“A public employee’s membership in a pension system is an enforceable contractual relationship and the employee has a constitutionally-protected right to the benefits of that contractual relationship…Those constitutional protections attach at the time an individual begins employment and becomes a member of the public pension system. Thus, under its plain and unambiguous language, the clause prohibits the General Assembly from unilaterally reducing or eliminating the pension benefits.”
In the short run, Chicago will be off the hook to find $250 million in additional revenue over five years to honor its commitment to stabilize the Municipal Employees and Laborers Pension Funds.
But over time, Chicago taxpayers will be forced to bear a far heavier, backbreaking burden because employees and retirees won’t be meeting them halfway.
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, 2015.
Emanuel initially proposed raising property taxes by $250 million over five years to bankroll the city’s increased contribution to save the two funds.
He agreed to substitute a 56 percent increase in Chicago’s telephone tax for the city’s first-year contribution, only after then-Gov. Pat Quinn balked at a pre-election property tax increase. The mayor has refused to say how he plans to meet the city’s increased obligations to the two funds after the first year, when the telephone tax will fall short.
“The city faces a short-term benefit of about $89 million that’s currently in escrow that can be used to help other areas of the budget. But it will be a very hollow victory for the beneficiaries,” Civic Federation President Laurence Msall said.
“While their contributions will diminish slightly, the condition of the funds will revert back to something that is totally unsustainable and in danger of being completely insolvent within 10 to 15 years,” he said.
The consequences for Chicago taxpayers are equally dire, now that the pension reforms have gone down in flames, Msall said.
“Hundreds of millions in savings from rationalized pension benefits will be lost that will either have to be made up from reductions in city services, increased taxes or by allowing these funds to further deteriorate,” Msall said.
“The city will face the unenviable possibility of funding these pensions on a pay-as-you-go basis or not being able to provide benefits to retired employees,” he said. “Both are extremely expensive and dangerous paths likely to trigger further downgrading” in the city’s junk bond rating.
Jeff Johnson, president of the Municipal Employees’ Society representing city workers, applauded the Supreme Court for a ruling, he claimed “most people agree with.”
“People who dedicated their lives for the city of Chicago should be able to age with grace and dignity. For too long, city workers have been labeled as the problem when, in fact, we are part of the solution. With a modest pension of $34,000 and a high population residing in Chicago, we are the single largest tax base of any group,” Johnson was quoted as saying in a statement issued after the ruling.
“We cannot afford to procrastinate in any more attempt at `pension reform’ which only prolongs the inevitable. We must do the right thing and properly fund the pension system with actuarial funding. A 30-year funding problem will not be fixed overnight. It will take a long-term, sound fiscal plan to ensure pension solvency.”
With less than $5 billion left in the Municipal Employees Pension fund, Johnson warned that the “clock is ticking” to avoid having the fund run out of money.
“The correct measures need to be taken to ensure a future for all workers who have given so much as well as providing some stability for taxpayers,” Johnson said.
“City workers are vested as much if not more than any taxpayer in this city. How we handle this time bomb will define our generation and set the path for keeping Chicago the great city that we, as city workers, have made it.”
AFSCME Council 31, the Chicago Teachers Union, the Il. Nurses Association and Teamsters Local 700 issued a joint statement arguing that “politicians caused the pension debt by failing” to adequately fund employee retirement benefits while city employees were “faithfully paying their share.”
“They earned, contributed to and counted on a modest pension–just $32,000 on average–instead of Social Security, for which city employees are not eligible,” the unions said.
“This ruling makes clear again that the politicians who ran up the debt cannot run out on the bill or dump the burden on public service workers and retirees instead. It is long past time for elected officials to stop trying to end-run the constitution and shirk their duty. Pension funding challenges require funding solutions that must be constitutional and fair to all. Our unions are committed to working with anyone of good faith toward that goal.”
The writing has been on the wall for Emanuel’s reforms since May 2015, when the Illinois Supreme Court overturned state pension reforms.
Moody’s Investor’s Service was so certain that Emanuel’s city reforms would face a similar fate, it didn’t wait for a court ruling. 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 interest and penalties.
Two months later, Moody’s was proved right. 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.”
In mid-November, the fat lady was singing again. Only this time, the 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.”
In Thursday’s ruling, the Il. Supreme Court shot down both of the city’s arguments.
“Most importantly, we reject the city’s assertion that the funding provisions of the Act must be regarded as a `benefit’ because they replace an illusory set of unfunded statutory promises,” the ruling states.
The Supreme Court noted that the “purported `offsetting benefit’ of actuarially sound funding and solvency in the funds,” merely guarantee city employees the pension benefits guaranteed to them by the Il. Constitution.
“Ultimately, the city’s `offsetting benefit’ theory rests on the proposition that what it deems as `modest’ diminishments are necessary to prevent insolvency in the future. Although we recognize that fiscal soundness is important, the General Assembly may not utilize an unconstitutional method to achieve that end,” the ruling states.
“The city’s theory would allow the Legislature through its funding decisions to create the very emergency conditions used to justify its suspension of the rights conferred and protected by the Constitution. This is the very circumstance that the pension protection clause was intended to foreclose.”
Earlier this week, top mayoral aides said the city’s course of action would depend largely on how Thursday’s Supreme Court ruling is worded.
If the court gives Chicago a road map on how benefit reductions and increased contributions might be negotiated — in exchange for some other benefit chosen by the employee — then Emanuel will bring labor leaders back to the bargaining table to hammer out such an agreement.
If the door is slammed shut and the court says there is nothing the city can do to change the benefits, then the mayor will have no choice but to find a way to pay the added costs.
In that case, he’ll try to negotiate work-rule changes, lower break-in pay for new employees, another round of health care reforms, and other cost-saving concessions, and dedicate those savings to pensions, City Hall sources said.
The remaining shortfall could come from raising the telephone tax. Chicago is legally authorized to raise its telephone tax to the highest rate charged by any municipality in the state. That means there’s room to grow.
More property tax increases are unlikely, considering the fact that Emanuel just raised property taxes by $588 million for police and fire pensions and school construction and has promised to raise them by another $170 million for teacher pensions, whether or not the state does its part to help a nearly bankrupt Chicago Public School System.
Ald. Carrie Austin (34th), chairman of the City Council’s Budget Committee, said she’s all for another telephone tax hike over yet another property tax increase. Bills reflecting the largest property tax hike in city history are due to arrive in Chicago mailboxes within weeks.
“I would prefer a telephone tax increase. That would be a little bit less taxing for our citizens. The big [property] tax that they got coming up on them–that’s a lot. If this is a smaller way to do that where it won’t be as detrimental, then I would rather see that,” Austin said Thursday.
Asked what kind of feedback she’s getting from her Far South Side constituents, Austin said, “I’m trying to help them brace for the telephone [tax]. That’s a lighter way. I would rather pay $20 on a telephone than to pay $2,000 on a property tax. That would be easier. It would be a more softer approach.”
Thursday’s ruling claims that, “as a matter of law, members of the funds did not bargain away their constitutional rights.” But, the Supreme Court’s language does hold out a glimmer of hope for the city.
“The pension protection clause was not intended to prohibit the Legislature from providing `additional benefits’ and requiring additional employee contributions or other consideration in exchange,” the ruling states.
Not surprisingly, the Emanuel administration seized on that portion of the ruling as charting a way forward for the city.
“Obviously, we would have preferred a win, but we don’t think the door is completely shut. They left the door open on collective bargaining as a possible,” said a top mayoral aide who asked to remain anonymous.
The Emanuel adviser specifically pointed to the approach that Il. Senate President John Cullerton (D-Chicago) has applied to the state pension crisis.
“Essentially, it offers the `consideration’ model. Future pay raises are not guaranteed as pensionable. Individual employees get to decide whether to make future pay hikes pensionable. In exchange for that, they agree to modification of pension benefits. Or, they get to keep the current benefit structure and give up future pay increases being pensionable,” the top mayoral aide said.
The top mayoral aide noted that the Il. Supreme Court overturned the “ramp and arc” that obligated the city to steadily increase its annual contribution to the two funds over a five year period. Instead, the city returns to a “multiplier” to determine annual funding levels.
In the short run, that gives the city “breathing space to figure out a path forward” that is almost certain to include another telephone tax hike.
“We have the 911 [telephone] tax that has been the source of these two funds. We’ve got a head start and some breathing room. The money continues to accumulate. Moving forward, since we already have a funding source for these two funds, I don’t know that we need to go to another one,” the Emanuel aide said.
The Illinois Supreme Court lowered the boom on Chicago just three days after it was disclosed that Emanuel had used $220 million in “short-term bridge” financing — at a heavy cost to Chicago taxpayers — to make a state-mandated payment to police and fire pension funds that’s higher than his tax-laden 2016 budget assumed.
Earlier this week, Emanuel emphatically rejected the suggestion that he “made a mistake” by trusting Gov. Bruce Rauner to sign legislation giving Chicago 15 more years to ramp up to a 90 percent funding level for police and fire pensions.
Before approving the largest property tax hike in Chicago history for police and fire pensions and school construction, aldermen demanded to know why Emanuel wasn’t proposing an even bigger increase instead of rolling the dice.
“I am not going to go to the property taxpayers of Chicago, who just stepped up in a big way, and say, `You should pay $250 million more because Springfield’s politics are dysfunctional. Get yourself another mayor. It was hard getting what I did passed. I’m not going to ask taxpayers to pay more to make up for Springfield’s failures. Not a chance,” the mayor said during a taping of the WLS-AM (890) Radio program, “Connected to Chicago,” to be broadcast at 7 p.m. Sunday.
“It was not like a wink. He verbally said he would sign it and he put it in his own legislation,” he said.
Emanuel acknowledged that borrowing more money is “not my favorite option.” But it’s a “better option” than asking property owners to pay more at a time when Rauner’s pro-business, anti-union agenda has the state “spinning around and not doing anything,” the mayor said.