The seven Illinois Supreme Court justices will decide the fate of Chicago's overhaul for two of its employee pension funds.

CHICAGO – Chicago squares off in the Illinois Supreme Court Nov. 17 with unions and pension fund members challenging the overhaul of its municipal and laborers' pension funds.

The fate of Chicago's 2014 overhaul of those pension funds depends on whether the high court's seven justices accept the city's contention that the overhaul preserves the pension funds rather than damages them, and that union acquiescence at the time renders the changes legal.

Both sides laid out their cases in recent briefs filed with the court for the case, in which the city is appealing Cook County Circuit Court Judge Rita Novak's July ruling voiding the pension legislation.

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.

At stake is the long-term solvency of the city's laborers fund and municipal employees fund and the legality of the city's solution, enacted in state legislation, for the two funds, which represent half of its $20 billion unfunded pension tab.

Investors have warmed to the city's solution for the other half of the problem, a huge property tax increase to fund higher contributions to its public safety pension funds.

Secondary market trading spreads on Chicago general obligation paper shrank by as much as 100 basis points after Mayor Rahm Emanuel announced the tax hike, which will in the end bring in $543 annually to fund police and firefighter pension contributions. The city council approved the plan last week.

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, though, the two funds will exhaust their assets in the next decade if they revert to the previous funding scheme.

"The act does not 'diminish or impair' the 'benefits' of 'membership' in the funds," the city's appeal says, quoting language in the state constitution's pension clause that is center stage in the dispute. "It does the opposite, by taking pension funds that are on a path to certain insolvency and ensuring that they will be fully funded, primarily through a massive influx of new city funding."

City Corporation Counsel Stephen Patton is the lead attorney representing the city.

 "Without the act, the funds will run out of money and will be able to pay only 30% of the amounts due," the city argues. "With the act, the city is obligated to actuarially and fully fund pensions, removing the risk that participants will receive only a fraction of what they were promised. Thus, the act does not "diminish or impair" benefits, but rather preserves and protects them."

That argument is one of two key legal positions the city hopes will persuade justices to validate the overhaul. The other argument looks to assert a tenet of contract law known as "consideration" in which a contract can be modified in exchange for some benefit that offsets a negative change.

"The act does not violate the pension protection clause because it was the result of a bargained-for exchange of consideration," the city's brief says. The city defends its claim by asserting that the reform package resulted from more than 23 meetings over more than two years with union representatives to reach a consensus. Ultimately, 31 unions representing fund participants took a vote with 28 in favor of the proposal that was sent to the General Assembly.

"These unions supported the act because they concluded that, absent the combined efforts of the city, its employees, and its retirees, the funds would soon be insolvent and would be able to pay only a fraction of the benefits that the state had promised participants in the pension code," the city's brief says.

The unions and fund members challenging the legislation dismiss that notion. Their position lands center on the pension clause's language and the cut in annuities due to changes imposed on cost of living adjustments.

"Given the act's annuity reductions, the circuit court correctly held that the act was unconstitutional," their brief says.

"In short, the act's funding provisions are at best only a partial and belated gesture toward what the pension protection clause was designed to force the General Assembly to do— provide for adequate funding without diminishing pensions," the brief says. "The 'net benefit' theory has things exactly backwards. Funding provisions cannot justify pension diminishments."

The city seeks to convince the justices to reject the lower court's opinion that union support at the time was constitutionally irrelevant because it did not result from formal collective bargaining and had some dissent.

"The city could not feasibly negotiate with every employee and retiree, which is precisely why the city negotiated with the recognized representatives of the MEABF and LABF member unions to achieve a legislative proposal that would save the funds from insolvency," the city argues.

 "Even as described by the city, nothing in the 'negotiations' that preceded passage of the act could be said to have contractually waived or 'bargained' away plaintiffs' personal pension rights," their unions' brief asserts. They also argue that retirees were not represented in negotiations.

The city also presses the high court's members to look beyond their May opinion voiding the state's 2013 pension benefit overhaul due to its contrasting legal arguments. The state overhaul cut employee benefits and raised employee contributions to cut unfunded liabilities and trim the state's annual payment schedule.

The Illinois Supreme Court found the legislation clearly violated the state's pension clause affording contractual rights to pension benefits that protects them from impairment or diminishment.

"The state never argued that the legislation did not diminish or impair benefits. Nor could it," the city brief says.

Senate Bill 1922, the reform legislation for the two city funds, in contrast calls for the city's annual payments to ramp up to an actuarially required contribution level while also trimming benefits and raising employee contributions.

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 legislation makes clear that Chicago is now obligated to fund the two pension funds, whereas in the case of earlier legislation on state pensions, the state had previously been on the hook for the health of its five funds before the reforms were enacted.

The Chicago legislation 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 argues that under the prior statutes, it had no obligation to cover payments once the funds' assets are exhausted.

"In short, the act provides real security, and eliminates substantial uncertainty, that pensions will be paid," the city argues. "It would turn the pension protection clause on its head if legislation so beneficial to the funds and their participants were deemed an unconstitutional 'diminution' or 'impairment' of pension benefits."

The union and fund members' dismiss the notion that the city wasn't already on the hook.

"Under the pension protection clause, MEABF and LABF members already have a right to payment of their promised benefits when due—a right safeguarded by the legislature's lack of any authority to diminish those benefits. This absolute constitutional guarantee was intended to leave the state and its municipalities in no doubt as to their pension obligations," their brief argues.

The unions attack the city's argument that the enforcement mechanisms are significant.

"The act does not purport to provide any guarantee as to the amount of state grant money that will be available should this provision be triggered," it says.

The unfunded liabilities of the laborers' and municipal employees' funds are growing by $900 million annually, exceeding all of the $830 million in property taxes the city originally expected to collect in 2015.

The case is Jones, et al. v. Municipal Employees' Annuity and Benefit Fund of Chicago, et al.

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