CHICAGO — The fiscal well-being of Chicago and its sister governments hangs in the balance as the Illinois Supreme Court considers whether the state's sovereign police powers trump constitutional protections against cutting pensions.
That's the warning from Chicago lawyers who lay out what's at stake for the city and sister agencies as the state's high court considers a constitutional challenge to a 2013 overhaul of the state pension system.
The city arguments come in an
The Supreme Court has agreed to expedite Illinois' appeal of a November ruling by Sangamon County Circuit Court Judge John Belz, who found the benefit cuts that impacted four of the state's five pension funds to be unconstitutional and voided the legislation in its entirety.
The state doesn't dispute the constitutional language that grants membership in a public pension system as "an enforceable contractual relationship, the benefits of which shall not be diminished or impaired." The state's lawyers counter that those rights are not absolute in consideration above all else including the state's police powers to alter a contract.
Chicago says its own stakes are high in the case, with the outcome potentially threatening its current and future efforts to stabilize its four funds, which have $20 billion of unfunded liabilities.
A rejection of the police powers argument could threaten reforms the state approved last year to its municipal and laborers' funds and potentially stymie or derail efforts to overhaul its police and fire funds. The city's attorneys stress that they believe the city reforms approved last year can withstand a constitutional test of their own regardless of the outcome of the state case.
"The pension crisis has already devastated Chicago's finances," the brief warns, highlighting the city's steep credit deterioration that has made it the lowest rated major city other than recently bankrupt Detroit.
If reforms to Chicago's pension funds languish "there is a significant risk that the city will suffer further downgrades, which would materially increase its cost of borrowing money essential to funding basic operations, and could make the city immediately liable to pay hundreds of millions of dollars as a result of defaults and early termination of debt-related obligations," the city's brief warns.
The city argues its own reforms will save two it funds from insolvency, stabilize city contributions, and protect accrued benefits with the bulk of impact felt on future increases though limits on cost-of-living adjustments.
The city's warning extends to include reforms adopted by the Chicago Transit Authority and Chicago Park District and efforts underway by Cook County and the Chicago Public Schools to win their own pension reform legislation.
All of those issuers have seen their credit ratings deteriorate because of their pension liabilities due to both their size and their overlapping reliance on the same tax base.
"The total sum of unfunded obligations for their respective pension funds is nearly $40 billion," the Chicago brief says.
"The cumulative effect of these separate crises confirms that this massive, immediate, and exponentially growing problem cannot be solved by relying on increased contributions from these entities alone," it says.
"Doing so would not only result in a failure to provide essential public services and irreparable harm to Chicago and the state's economy, but would also ultimately result in the funds' insolvency and failure to pay the bulk of the benefits promised," the brief says.
The city's warning goes even further, encompassing local governments across the state. While most other local governments outside Cook County participate in a state municipal fund for general employees, many manage their own police and fire funds.
A state mandate will require local governments move to an actuarially required annual contribution level to stabilize the funds.
Chicago alone faces a $550 million spike next year due to the mandate. Negotiations on a reform package with public safety unions have been on hold pending the outcome of the state litigation as unions wait to assess their bargaining position.
"The Circuit Court's ruling also jeopardizes badly needed pension reform for other Illinois municipalities and governmental entities, many of which are likely to become insolvent or, at a minimum, cease providing essential services absent reform of their pension funds," Chicago warns.
The city argues in favor of the police powers argument citing both Illinois and federal court precedents that subject contracts to modification and hold a state's police powers to be inherent and essential.
The city also argues that debate at the state's 1970 constitutional convention does not appear to show an attempt by participants to give pensions super contract status over police powers.
"The Circuit Court's decision is unprecedented and draconian," the city argues, adding it fails to take into consideration the catastrophic results on services if benefits can't be altered under any circumstances. "This turns the Pension Clause into a suicide pact, and violates the settled and fundamental principle that a promise by one legislature can be modified by another."
For the city and other local governments, it's sink or swim based on the sovereign police powers defense. An alternative legal argument on the state case might be based on "consideration," meaning the state offers some positive modification of the pension contract such as its lowering of employee contributions to offset the cuts.
The city outlines the difficulty it would face in making such an argument and warns there is no "feasible argument" to the police powers exception to alter a contract.
The city calls on the court to confirm that the state's police powers apply to pensions as other contracts and to remand the case to the lower courts to consider the subsequent argument of whether the reform legislation represents a legal exercise of that authority.
The Chicago Public Schools, the Illinois Policy Institute, the Civic Federation of Chicago, the Civic Committee of the Commercial Club of Chicago, and Illinois Municipal League as well as the Constitutional Law Professors and the International Municipal Lawyers Association have
The response from the unions, employees and retirees who sued to void the peons law is due in February with oral arguments expected during the court's March term.
The state is saddled with $111 billion of unfunded pension obligations. The reforms are aimed at shaving $145 billion of state payments in the next three decades and would trim $21 billion off the unfunded obligations' tab.
Chicago is rated Baa1 with negative outlook by Moody's Investors Service which calls the city an outlier among local governments on the size of its pension obligations.
Fitch Ratings assigns an A-minus rating and negative outlook to the city and Standard & Poor's rates it A-plus with a negative outlook.
The municipal and laborers' reforms are on hold with the city facing two lawsuits. The reforms call for higher city and employee contributions and some benefit cuts, including a reduction in existing annual cost-of-living increases.
The legislation imposes a five-year ramp up period in contributions to 2020, with city contributions growing a total of $750 million, when payments would reach an actuarially required contribution level that puts the funds on course to a 90% funded ratio in 40 years.
The brief was submitted by city corporation counsel Stephen Patton with aid from other city attorneys and Kirkland & Ellis and Richard J. Prendergast Ltd. lawyers.
