Chicago phased out most retiree healthcare subsidies, triggering a legal challenge.

CHICAGO – A judge is expected to rule this month on Chicago's latest effort to quash a lawsuit filed by retired city employees who want to preserve their healthcare subsidies.

Cook County Circuit Court Judge Neil H. Cohen heard oral arguments on July 6 and said he expected to issue a ruling on the city and pension funds' motion to dismiss in the next two weeks, according to retiree lawyer Clint Krislov.

The retirees are challenging Chicago Mayor Rahm Emanuel's efforts to phase out most retiree healthcare subsidies – or other post-employment benefits -- which had cost the city about $100 million annually. They argue the benefits are protected by the state constitution's pension clause and that the city is seeking to breach its contract with retirees.

The retirees argue that the Illinois Supreme Court's 2014 Kanerva v. Weems decision makes clear that their subsidies are protected. In the Kanerva decision, the high court did not rule on whether changes the state made to retiree premium subsidies actually impaired retiree benefits, just that they are protected under the state constitution pension clause which gives benefits contractual protections against being impaired or diminished.

The city counters that the subsidies were structured in a way that does not obligate the city to maintain them under state statutes.

"I expect whichever side loses would appeal and it would ultimately end up before the Illinois Supreme Court," Krislov said.

Emanuel began phasing out most retirees' healthcare subsidies in 2013, a decision that prompted the lawsuit. A city-commissioned report had concluded Chicago could not afford to provide the assistance given its  "financial circumstances, industry trends, and market conditions," court documents said.

The move followed the state's establishment of healthcare exchanges under federal healthcare reform, which the city argued would provide an affordable option.

The suit seeks a permanent solution for participants in the city's annuitant healthcare plan after 26 years of litigation and temporary agreements. The current complaint "seeks permanent protection for participants in the city of Chicago Annuitant Medical Benefits Plan," documents say. The protection is being sought for employees hired before 1989 when benefit changes were implemented.

Chicago previously reported paying $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, that $108 million annual bill was projected to grow to $307 million in 2018 and $541 million in 2023, according to the commissioned report. The city anticipates $30 million in savings in the 2016 budget and increasing savings after phasing out the subsidy for most in the following year.

Chicago covers 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, under the assumption that the bulk of the city's obligations were to end. Continuation of the existing plan would result in a $2.1 billion accrued unfunded liability.

The city's OPEB liabilities are separate from the city's $20 billion of unfunded pension liabilities that have dragged its credit ratings down to a low of junk from Moody's Investors Service.

The city approved a record property tax increase last year to cover a big jump in police and firefighter contributions under a state mandate.  The high court threw out reforms to the laborers' and municipal employees funds in March. The city has announced a plan to use emergency phone surcharge revenue to fund higher laborers' fund payments but has yet to announce a plan to rescue its municipal fund. Both are headed toward insolvency in the next decade.
The current retiree healthcare complaint was amended after the court threw out several counts for technical reasons late last year.

Chicago's OPEB litigation dates to 1987 when the city filed a complaint — City v. Korshak — to clarify its obligations, if any. Agreements were struck but they have expired. Under the city's plan to phase out most subsidies, existing benefits for those who retired before mid-1989 would be preserved and police and firefighters who retire before they are eligible for Medicare also will continue to receive the benefit as required under their contract.

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