CHICAGO –Chicago plans to begin scaling back on retiree healthcare premium subsidies in its 2014 budget, even though a legal challenge to its plan to phase out the subsidies for most retirees faces a legal challenge.

Mayor Rahm Emanuel announced that the city has begun informing retirees of the changes effective Jan. 1. Under federal law, the city must notify plan participants of benefit provisions by Oct. 15. The city changes which will save about $24 million next year are the beginning of a plan to phase out subsidies for most who retired after Aug. 23, 1989, over the next few years. Prior retirees will continue to receive an subsidy of as much as 55% in the city’s healthcare plan.

“In light of the evolving national healthcare landscape, as well as pressures faced by our taxpayers, we are adjusting the current retiree healthcare plan while continuing to provide a substantial city subsidy in 2014,” Emanuel said in a statement.

Chicago retirees who stand to lose city subsidized healthcare have sued the city to hold on to a benefit they believe is constitutionally protected. The complaint seeks a permanent solution for participants in the city’s annuitant healthcare plan after 26 years of litigation and temporary agreements.

Emanuel announced over the spring his plan to shift most retirees to the state healthcare exchange being established next year as part of federal care reform. The city contends it can no longer afford the retirement perk that falls under the category of other post-employment benefits, or OPEBs.

The city pays $64 million to cover its share of benefits for non-Medicare annuitants and their spouses and dependents, and another $44 million for Medicare. If left intact, the current $108 million annual bill is projected to grow to $307 million in 2018 and $541 million in 2023, according to a city commission report. The city’s pension funds also contribute to cover the retiree healthcare plan. The city asserts it’s within its legal rights and that it’s not simply casting retirees off.

Chicago’s OPEB litigation dates to 1987 when the city filed a complaint — City v. Korshak — to clarify its obligations, if any. Benefits had continued under temporary agreements put in place.

The city and pension fund trustees reached a temporary settlement agreement in 1988 that required Chicago to cover half the cost until 1997 and for retirees to increase their contributions. The class annuitants objected to the settlement, but it received court approval.

The total number of participants in the subsidized plan stood at 24,721 in 2011 including annuitants and their covered beneficiaries, according to the lawsuit.

The city is facing a $339 million deficit heading into 2014. Emanuel recently said the budget plan he will announced later this month won’t include a hike in property, sales, or gas taxes.

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