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Court Upholds Illinois OPEB Overhaul

CHICAGO — An Illinois judge on Tuesday dismissed litigation challenging a state overhaul of retiree health care benefits after concluding that strict protections afforded to pension benefits in the state constitution don't extend to the health care perk.

The ruling dismissing the consolidated lawsuit represents a blow to public unions and a rare bit of good fiscal news for the state. Agreement on pension reforms to restrain skyrocketing annual pension payments and chip away at $95 billion of unfunded liabilities has eluded the General Assembly, but lawmakers were able to pass legislation revamping the state's other post-employment benefits last year.

Under the new plan, retirees will pay a greater share of the premium costs based on their income. Four lawsuits were filed, asserting that the changes violated provisions of the state constitution protecting pension benefits and granting them the status of an enforceable contract.

The lawsuits were consolidated and the state's lawyer — Attorney General Lisa Madigan's office — filed a motion to dismiss, arguing retiree health care does not enjoy the same status as accrued pension benefits. Oral arguments were held last month.

Sangamon County Circuit Court Judge Steven Nardulli sided with the state in tossing out the lawsuit Tuesday. "Health insurance benefits are not guaranteed pension benefits protected by the Pension Protection Clause," he concluded. "Plaintiffs do not have a vested contractual interest in free health insurance." Based on his finding, the judge said he did not need to render a decision on whether the law impaired a contract.

Union officials said they would consult with the various plaintiffs in the lawsuits to decide their next step in response to the court's action. "We are greatly disappointed by today's decision," AFSCME Council 31 executive director Henry Bayer said in a statement. "We continue to believe this law impairs the rights of men and women who retired after careers with state government or state universities to obtain health insurance coverage according to the terms in place when they retired." AFSCME was not a plaintiff but supported the litigation.

Gov. Pat Quinn lauded the ruling. "I am pleased with the court's action today to uphold this important law. This is good news for the taxpayers and another step forward in our effort to restore fiscal stability to Illinois," he said.

Previously, the state fully covered the premiums for those who retired prior to 1998. For retirees after that date, it provided a 5% subsidy for retirees' health care premium coverage for every year of service.

Under the new law, the Illinois Department of Central Management Services determines the subsidy based a sliding scale that takes into consideration length of service and a retiree's ability to pay.

The benefit levels are subject to collective bargaining negotiations with state unions. The state had covered the full cost for about 90% of more than 78,000 retirees in the group insurance program that covers a total of 357,800 people when current employees are counted.

The subsidies carry a price tag of more than $877 million in the current fiscal year as the state funds its OPEB on a pay-as-you-go basis. Unfunded liabilities total about $33.3 billion. Officials estimate that the legislative changes could shave $9 billion off that figure.

The state's newly ratified union contract shaves $900 million off the state's bill for retiree health care over its three-year term. The unions negotiated the changes with the state but had continued to wage a legal battle against the legislation.

The court rejected the plaintiffs' arguments that health insurance benefits are a vested retirement benefit and instead focused on the notable differences between the two.

"The fact that medical technology and contracts offered by insurance companies change, as opposed to the actuarial certainty of a pension payment, lead this court to the conclusion that health insurance benefits are not the same as a pension protected by the Pension Protection Clause," the ruling read.

The pension protection clause reads: "Membership in any pension or retirement system of the state, and unit of local government or school district, or any agency thereof, shall be an enforceable contract relationship, the benefits of which shall not be diminished or impaired."

The ruling — if it stands should the plaintiffs appeal — could bolster Democratic Senate President John Cullerton's proposed pension reform package. Under the legislation, benefit cuts and increased contributions that originated in a House-sponsored version would be enacted. In the event that any of the cuts in the so-called Plan A part of the legislation are declared unconstitutional by the courts, a backup "Plan B" would take effect.

The alternative plan asks employees to accept benefit changes in exchange for preserving their access to retiree health care. Cullerton wants the alternative plan included in the legislation because he fears imposing cuts without the voluntary shift may not withstand the expected constitutional challenge. Critics of the dual plan fear that the presence of the backup hurts the legal chances of Plan A, which would chop significantly more off of the state's unfunded liabilities.

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