CHICAGO — Chicago retirees who stand to lose city subsidized healthcare under Mayor Rahm Emanuel's plan to dismantle their existing program and move most over to the state's pending healthcare exchange are firing back, suing the city to hold on to a benefit they believe is constitutionally protected.

The suit seeks a permanent solution for participants in the city's annuitant healthcare plan after 26 years of litigation and temporary agreements. The complaint was filed by Michael C. Underwood and more than 300 fellow plan participants against the city and trustees for the city's four funds last week in Cook County Circuit Court. It seeks class action status.

"We want a permanent resolution declaring that the participants have a right to their healthcare benefits based on their participation in their respective pension and retirement systems as guaranteed by the Illinois constitution," said attorney Clint Krislov of Krislov & Associates. Krislov filed the latest complaint on behalf of city retirement fund participants and has long been involved in the ongoing litigation over retiree healthcare subsidies.

The new complaint comes in the wake of Emanuel's announcement this spring that the Chicago intends 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.

Moody's Investors Service's July 17 three-notch downgrade of Chicago's $7.7 billion of general obligation bonds over its massive unfunded pension obligations of $19 billion underscores the city's need to trim its expenses. Moody's assigns Chicago a negative outlook, as the city faces a $600 million contribution hike to fund its police and firefighters funds in 2015.

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.

"The city of Chicago is confident in our legal position, and we are committed to developing a plan for meeting healthcare needs of retirees that also protects taxpayers," said a statement from the mayor's office. "The evolving landscape of healthcare combined with the city's unsustainable healthcare costs reinforces the necessity of these changes."

Chicago currently covers 55% of the costs for annuitants who retired before 2005 with contributions for later retirees based on an annuitant's length of city employment. Chicago covers its retiree health care costs on a pay-as-you-go basis and its accrued unfunded OPEB obligation at the end of 2011 was just $254 million, but that assumes that the bulk of the city's obligations ends this year. Continuation of the existing plan would result in a $2.1 billion accrued unfunded liability.

The tussle between the city and its retirement plan participants comes amid heightened scrutiny of OPEBs and escalating challenges to their status as a protected retirement benefit, which varies based on local laws.

Detroit emergency manager Kevyn Orr proposed tackling an estimated $5.7 billion OPEB liability by shifting retirees onto the new state health insurance exchange. Orr's restructuring plan is subject to approval by a federal bankruptcy judge overseeing the city's Chapter 9 filing.

Chicago's OPEB litigation dates to 1987 when the city filed a complaint — City v. Korshak — to clarify its obligations, if any.

A trial ensued but 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.

As the 10-year deadline approached, the annuitants sought to revive their lawsuit. All parties to the litigation then reached another temporary agreement in 2003 that continued benefits through June 2013.

Emanuel's plan to phase out the subsidy came ahead of the June 30 deadline. Krislov said he initially sought a temporary extension of existing benefits to enable retirees to consider whether future participation in the healthcare exchange might prove more economical, but the city rejected that proposal leading to the filing of the new complaint.

The retirees — some of whom suffer from chronic illnesses and fear they can't afford the cost of private insurance — argue they are entitled to the benefits promised at the time they began participation in one of the city's four annuity and benefit plans. They base their position on language in the state constitution.

The various subsets of annuitants include the original Korshak class who retired before 1987, those who retired between 1987 and 1989, and annuitants who began participating in one of the funds prior to August 1989, which includes a mix of retired and current employees. A fourth class of participants are those hired after August 1989, a date distinguished by the insert of statutory language that the benefit was not protected by the state constitution.

While the first three are arguing their benefits are protected under the constitution, the claims of the fourth class will turn solely on whether the General Assembly can legally declare a benefit not subject to the constitution.

Under Emanuel's proposal, existing benefits for retirees before 1989 would be preserved. Police and firefighters who retire before they are eligible for Medicare also will continue to receive the benefit as required under their contract. Others would continue to receive their existing benefits through 2013. Changes would be negotiated and implemented over three years with coverage terminating at the start of 2017.

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 lawsuit cites the state constitution clause on pension benefits that has often been repeated in the ongoing state legislative debate over pension reforms and what changes can be made without running afoul of the constitution.

"Membership in any pension or retirement system of the state, any unit of local government….or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired," the clause reads.

The complaint argues that employees covered by the plans expected the lifetime benefit when they took their jobs and it influenced their decision to work for the city and their retirement planning.

The state too has taken action to rein in its subsidies but its plan calls for shifting more of the burden for premium costs over to retirees based on their income and length of service. Some believe the city's case was helped by a Sangamon County Circuit Court judge's decision in March throwing out a challenge to the state overhaul. The court concluded that the constitution didn't protect the health care benefit. The Illinois Supreme Court agreed in April to hear the case.

Krislov's concerns that the ruling could harm his clients' case prompted him to file an amicus brief in which he asks that the state's high court to reverse the decision. In the filing, Krislov argues that group health benefits have been a benefit of participation in the city's pension funds since at least 1982 and enjoy the same rights as any other promised pension benefit.

If it succeeds, the plan to shed much of its OPEB cost is considered a bright spot in Chicago's credit profile.

Moody's three-notch downgrade cut $7.7 billion of city GO debt and $566 million of sales-tax backed debt to A3 while dropping sewer and water debt two notches. The level of the downgrade, which surprised market participants, was due to the size of the city's pension liabilities — up to $19 billion last year from $16.9 billion in 2011 — and the agency's shift in its rating methodology on pension obligations.

Fitch Ratings has the city's AA-minus GO and sales tax ratings on negative watch over the pension crisis. Standard & Poor's rates the city's GOs A-plus with a stable outlook.

In Detroit, Orr's plan calls for current retirees to receive modified medical benefits using either the exchanges or Medicare, with the goal of saving between $27.5 million and $40 million annually. In nearby Pontiac, Mich., which is under emergency management, a state board recently approved the manager's plan to pay off the city's roughly $150 million OPEB liability by dipping into the city's over-funded pension fund and providing a subsidy for at least a year to help defray the costs of buying insurance on the state exchange. In Stockton, Calif.'s bankruptcy, the court allowed the city's elimination of retiree healthcare benefits to stand.

In a new municipal commentary on the subject of OPEB challenges and the move to shift the burden to state health insurance exchanges, Wells Fargo Securities noted the potential impact. "If more municipalities begin to shift their retirees to the exchanges, this sizable population has the potential to distort the anticipated actuarial profile of HIEs," the report authored by analysts George Huang and Natalie Cohen read.

The Affordable Care Act's "original intent was that predominantly younger, healthier, uninsured people would come onto the exchanges, making the plans on these marketplaces competitive and affordable as well as lowering the aggregate consumption of services," it continued. "However, an unexpected surge of municipal retirees onto the HIEs could drive up insurance premiums for younger participants."

— Caitlin Devitt contributed to this story.

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