CHICAGO – Higher pension contributions made by the the Chicago Park District will remain with the retirement fund but employees will get at least $4 million back after a judge voided the district’s 2014 pension overhaul, which was designed to stave off looming insolvency.
The district’s retirement system overhaul is the latest to fall victim – a did state government's and Chicago’s original reform legislation packages -- to the state constitution’s stringent pension clause that protects promised benefits against impairment or diminishment.
The pension changes outlined in General Assembly approved legislation were signed in 2014 and took effect Jan. 1, 2015. They cut benefits for employees and annuitants and raised employee and park district contributions.
A current employee and retiree with support from a key park district union – the Service Employees International Union Local 73 -- sued in October 2015. The lawsuit is known as David Biedron et al v. Park Employees’ and Retirement Board Employees’ Annuity and Retirement Fund et al.
“There is no dispute between the parties, and the court agrees, that the challenged amendments…are unconstitutional under the pension code, and, therefore, are void,” Cook County Circuit Court Judge Neil H. Cohen wrote in a March 1 opinion. Illinois Supreme Court rulings in 2015 and 2016 had tossed pension reforms passed for Chicago and the state system, respectively.
The park district had assembled the plan after negotiations with the pension fund and impacted workers. The district closed out 2012 with unfunded liabilities of $550 million for a funded ratio of 43.4%. The changes shaved $110 million off the district's unfunded liability and put the fund on track to reach a 90% funded ratio by 2050. It was previously headed toward insolvency in 2023.
“This will be detrimental for the thousands of former and current employees who depend on the fund for their livelihood. We still hold firm in our belief that pension reform is critical to ensuring the financial security for our retirees," the park district's chief financial officer, Steve Lux, said in a statement.
Park district spokeswoman Jessica Maxey-Faulkner added that the district will be working on a plan with “our labor partners and other stakeholders to craft pension reform legislation.” Because the fund gets to keep the district’s higher contributions through 2017, the date the pension system is now on track to exhaust assets is unclear.
Chicago re-tooled its pension legislation so that it primarily relies on higher city contributions. The General Assembly approved the city’s revised packages but Gov. Bruce Rauner sought to block them. The city’s final plan was tucked into the budget bills that overcame Rauner’s vetoes.
Unions had turned against the park district legislation after the district’s 11th-hour decision to add retiree annuities to the package and, buoyed by the state Supreme Court’s May 2015 tossing of state pension reforms, the unions sued in October 2015.
A 2016 agreed-to order suspended the cuts that applied to retirees but the remainder of the lawsuit continued. The district's lawyers and the union engaged in negotiations in an attempt to reach agreement on a plan that would save the pension fund while also passing constitutional muster. Negotiations faltered and the lawsuit proceeded with the park district seeking to sever unchallenged portions of the legislation. The union argued the entire package was void.
Cohen ruled on March 1 that all provisions of the legislation were unconstitutional.
The legislation had sought to increase the retirement age for some, changed the formula used to calculate automatic annual increases for both current and future retirees, and eliminated automatic annual annuity increases in 2015, 2017 and 2019.
The pension fund owes employees $4 million in higher contributions they made.
The pension fund can keep the district’s higher annual and supplemental contributions through 2017. The legislation called for the district to phase in a hike in its contribution levels from 1.1 times employee contributions to 1.7 in 2015 and continuing upward to 2.9 times in 2019 with that level remaining in place until the fund is 90% funded. The district also made supplemental payments of $12.5 million each in 2015 and 2016 and $50 million was to be due in 2019.
The court concluded there’s no “statutory prohibition on the district making voluntary contributions” to help preserve the fund’s ability to pay promised benefits in the future, a March 21 order said. The 2019 tax levy will be lowered to reflect the previous park district payment formula.
“Nothing in the order should be interpreted as resolving the issue of the funding needed to increase the solvency of the Pension Fund” nor should it “be interpreted as relieving the stakeholders’ obligation to take the necessary measures to ensure that the fund will be able to pay promised pension benefits in the future, which the Circuit Court and the parties acknowledge will require legislative action,” the order says.
The park district posted an investor disclosure on the court rulings and subsequent orders.
As of December 31, 2016, the district’s retirement plan carried a net pension liability of $813 million and a funded ratio of 39.1%, down from 43.5% in FY 2015, according to the latest actuarial report.
The district carries double-A level ratings from three rating agencies while Moody’s Investors Service has its rating at a junk level due to its governance ties to the city. The district has about $800 million of debt.
"Successful legal challenges reversing the net positive credit impacts of pension reform would likely have a negative impact on the rating," Fitch Ratings has said in prior reports.