CHICAGO – The fate of Chicago's overhaul of two of its four pension funds – a central piece of the city's effort to tackle a $20 billion pension tab that has dragged its ratings down -- now rests with the seven justices of the Illinois Supreme Court.
Chicago's top lawyer, Corporation Counsel Stephen Patton, squared off against lawyers for members of the Chicago laborers' fund and municipal employees fund who challenged the 2014 state legislation. The reform package cut benefits, while raising city and employee contributions, and explicitly made it a clear city obligation to put the two funds with $10 billion of unfunded obligations on a stable path.
Cook County Circuit Judge Rita Novak in July voided the legislation and many legal experts following the case believe it's a long shot that the state's high court will restore the changes.
The city contends that the overhaul preserves the pension funds rather than damages them, and that union acquiescence at the time renders the changes legal. The fund members say the state constitution's pension clause trumps those arguments as it gives contractual rights to membership in the funds and protects benefits from being diminished or impaired.
Most questioning from justices was directed at Patton over the city's argument that fund participants will see a "net benefit" as the changes save the funds from looming insolvency. And some of the questions signaled that several justices are skeptical of that argument.
"This appeal hinges on two facts….without the act the funds will become insolvent in a matter of years," Patton told justices. "Second, the act avoids this looming disaster for the funds and their participants by massively increasing the city's contribution and imposing a new obligation to pay an actuarially" based contribution.
Patton sought to distinguish the legislation that altered the city's pensions and its legal arguments from the state government's pension reforms, which were overturned by the justices in a May ruling.
The state attempted cut benefits and state contributions while raising employee payments to trim unfunded obligations. The state did not argue that its reforms enhanced the funds, instead that its sovereign police powers allowed it to act in a fiscal emergency to alter the contractual rights of employees on benefits.
The justices rejected that argument and found the reforms a violation of the pension clause.
"This case is unique," Patton argued for Chicago. "It is different because the act here overwhelmingly benefits fund participants and avoids insolvency. It does not diminish or impair pensions under the plain language of the pension clause."
Under the plan, Chicago is obligated to make payments into the two pension funds at an actuarially based level in five years and unions have the right to sue should the city fall short. The city argues that under the prior statutes, it had no obligation to cover payments once the funds' assets are exhausted. The city says that's another factor that runs counter to the state reforms, because the state was already on the hook to ensure funding for its five pension funds.
When one justice asked how the promise of sound funding represents a net benefit when the actual benefits are promised under the pension clause, Patton turned the question around and asked: "What use is a benefit unless the money is there to pay it?"
Patton attempted repeatedly to drive home under questioning that before the reform legislation took effect the funds did not enjoy a city-backed funding guarantee.
The legislation "creates a backstop that the city is responsible," he said.
One justice asked whether it was the city's position that the pension clause guarantee doesn't apply if the money is not there to cover annuities.
Patton said the reform legislation clears up any uncertainty. "Participants are immeasurably better off," he responded.
Patton then turned to the city's consideration argument when asked by one justice why the court should look at the legislative act's history if the statute is clear and benefits were cut.
The city contends that the agreement of many impacted unions who participated in negotiations meet the legal theory of consideration in which a contract can altered through a bargained-for exchange that offers some favorable benefit.
The city cited a footnote in the high court's May ruling that suggested consideration provided a legal path forward, but one justice questioned the city's position, because it was only some unions, rather than all fund members, who agreed to the changes.
Patton said such sweeping consent was impractical and the union negotiations represented a "reasonable and commonsense approach" the court could apply.
One justice skeptically asked if employees should have known that their benefits might not be there in retirement under their contract with the state. Lawyers for the two funds offered brief arguments in support of the legislative changes.
Lawyers for the fund members who brought the complaints sought to keep their arguments simple.
"The General Assembly has no authority to unilaterally diminish pension benefits. There's no dispute that under this act…members would receive reduced pensions," said John Shapiro. "These are defined benefits insulated from the political winds that may blow from time to time."
Shapiro said the looming insolvency boils down to a statutory funding scheme that did not match the needs of the two funds, and now the city is looking to avoid its obligations through benefit cuts.
"Funding provisions cannot justify pension reduction benefits…they are constitutional obligations," Shapiro said, adding there's no protection that future lawmakers won't unravel the funding guarantee.
Another attorney for the fund members attacked the city's bargained-for exchange argument as a violation of individual member rights.
"The fundamental due process rights of participants need to be protected," he said.
The legislation also was altered from what was agreed to by the unions during the negotiations, Shapiro added.
Krislov dismissed the city's assertion that its legal arguments are substantially different from the state's case. "This is the same case….same issues, same arguments, same result," he said, accusing both the city of justifying cuts to save the funds, in the city's case, and to ease the funding burden, in the state's case.
Investors and rating agencies are following the case closely. They've warned that the city's battered credit quality faces further deterioration if it fails to solve its pension mess. Moody's Investors Service dropped the city to junk in May. Chicago recently adopted a 2016 budget that includes a record $543 million annual property hike to be phased in over four years to deal with rising payments owed to the city's other two funds, which cover police and firefighters.
If the court upholds the lower court decision throwing out the laborers' and municipal employees' reforms, Chicago would actually get near-term budget relief because the plan called for the city to make $100 million in additional contributions in 2016. In the long run, the city would face a more burdensome strain as the funds revert back to the previous funding scheme.
Under the legislation, the city's contributions to the two funds rise from $177 million in 2014 to a projected $650 million in 2021. The plan puts the funds on course to a 90% funded ratio in 40 years.
The overhaul won state legislative approval last year and was signed into law by former Gov. Pat Quinn. It took effect Jan. 1. The case is Jones, et al. v. Municipal Employees' Annuity and Benefit Fund of Chicago, et al.
