Chicago and unions challenging changes to two of its four pension funds will lay out their cases in court Thursday

CHICAGO - Chicago and the unions challenging the city's overhaul of its municipal and laborers' pension funds square off in court Thursday, with the city's efforts to stabilize its rocky fiscal foundation at stake.

Several unions, retirees, and individual employees argue that cuts in members' automatic annual cost-of-living adjustments and higher employee contributions violate the Illinois constitution's pension clause, which protects against any impairment or diminishment of their benefits.

The city argues the overhaul - approved by the General Assembly last year in Senate Bill 1922 - when taken as a whole saves the funds from looming insolvency in 10 to 13 years, through benefit reductions and an infusion of new revenue. The legislation also puts the legal onus on the city going forward to stabilize the funds on an actuarial basis and puts Chicago on the hook to pay annuitants.

The city further argues that most unions agreed to the changes.

"SB1922 therefore provides a massive net benefit for participants, because it takes funds that would otherwise become insolvent and obligates the city to fund them on an actuarial basis, ensuring they will be able to meet their obligations," city filings read. "Thus, under the plain language of the pension clause SB 1922 does not 'diminish or impair' pension benefits; it preserves and protects them."

The unions challenging the overhaul dismiss the city's chief contentions, arguing that the plain language of the constitution's pension clause is clear and recently reinforced by the Illinois Supreme Court's decision in May overturning the state's 2013 pension reform package as unconstitutional.

"The act diminishes pension benefits in at least three ways: it reduces members' annual, automatic annuity increases; it eliminates those annuity increases altogether in certain years; and it increases the required pension contributions of current employees," attorneys for the municipal fund plaintiffs argue.

"In its recent Pension Reform decision, the Illinois Supreme Court left no doubt that the Pension Protection Clause shields the very benefits diminished by the Act," union court filings said. The plaintiffs call on the court to strike down the law.

Rating agencies and investors are watching closely because the overhaul of the two funds is a central piece of the city's efforts to solve a pension dilemma that has dragged its rating from Moody's Investors Service down to junk.

The overhaul won state legislative approval last year and was signed into law by former Gov. Pat Quinn.

Under the package, the city's contributions ramp up over five years to 2020 to reach an actuarially required contribution level that puts the funds on course to reach a 90% funded ratio in 40 years. Contribution levels were previously set in statute and often fell short of actuarially required levels, driving up the city's unfunded obligations in its four funds to $20 billion, for a collective funded ratio of just 34%.

The legislation makes clear the city's obligation to fund pension payments and includes a provision that gives unions the right to sue should the city fall short of its required contribution levels and calls for the diversion of city grants from the state to the funds. The city's payment would rise by about $90 million next year under the legislation, which took effect Jan. 1

The city had the support of 28 of 31 unions impacted but remaining opponents sued. All agreed to put the case on hold as a union challenge to the state system reforms played out. Days after the high court's ruling voiding the state reforms, the city case resumed with arguments set for July 9 on motions from both sides for a summary judgments. Cook County Circuit Court Judge Rita Novak is hearing the case.

At the May hearing, Chicago Corporation Counsel Stephen Patton told the judge "prolonging a decision … can be extraordinarily harmful to the city….we've had two downgrades since we were last in front of you; exactly what we feared would happen. Given the financial circumstances of the city right now, the sooner we know the better."

Most notably, Moody's Investors Service downgraded Chicago general obligation bonds to speculative-grade Ba1 in May.

The city contends the state Supreme Court decision doesn't directly impact its case due to several differing factors. The city argues that under previous statutes it was not legally obligated under the pension clause to ensure that retirees get their checks. The state, in contrast, was already on the hook for its funds prior to its attempted pension overhaul.

The city also brought the legislation to lawmakers after collective bargaining, which the state did not. The city is hoping that argument carries weight with the court based on language in the high court's May decision which left the door open to "consideration."

Under contract law, cuts may be acceptable if the other party receives some benefit.

"There can be no doubt that any reductions in benefits in SB1922 were a bargained-for exchange adopted by the General Assembly for which the city provided valuable consideration - billions of dollars in new funding that the city was not previously obligated to provide," the city filings argue.

The city has argued that its hands were tied on pension contributions because they were tied to a percentage of employee contributions based on a statutory formula that doesn't take actuarial funding requirements into account; without the overhaul legislation the funds are on track to exhaust assets in the next decade. The unions counter that under the city's home rule powers it "is crystal clear that the city has the power to raise revenues to contribute more... than the statutorily mandated floor."

The unions also attack the legislation's payment enforcement provisions, arguing they are watered down by a provision that allows the courts to "order a reasonable payment schedule to enable the city to make the required payment without significantly imperiling the public health, safety, or welfare."

All sides, including Judge Novak, agree that the case will end up in the state Supreme Court no matter who wins. The city hopes for a final high court ruling before the end of the year.

"If the pension reform changes to the COLAs and employee contributions are struck down, the city would likely revert to the lower, statutorily based payments," Fitch Ratings said in a report earlier this week affirming the city's BBB-plus rating. :Under this scenario, the related liability could be expected to continue to rise and the rating would likely be downgraded." Fitch assigns a negative outlook to the city.

Separately, the city faces a $550 million spike in contributions next year to its police and fire funds under a 2010 state mandate to stabilize public safety funds across the state. State lawmakers approved legislation recently that phases in the shift to an actuarially based schedule and extends the time to reach a 90% funded ratio by 15 years, which would lower the city's immediate contribution requirements. It's unclear if Gov. Bruce Rauner will sign it.



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