CHICAGO - Litigation challenging Chicago's pension reform legislation threatens the city's ability to escape $19 billion of unfunded liabilities, Fitch Ratings said Friday.
The legal challenge was filed on Tuesday in Cook County Circuit Court by unions, employees, and retirees who are members of the municipal employees' fund. It asks the court to block reforms approved by the state legislature that are scheduled to take effect Jan. 1, and to void them as a violation of the state constitution's language that protects public pension benefits against being impaired or diminished.
The legislation, approved after lobbying from Chicago Mayor Rahm Emanuel, includes benefit cuts and higher contributions to shore up the municipal employees and the laborers' funds. Both are headed toward insolvency absent the reforms. Members of the laborers' fund are not a party in the litigation.
The Illinois constitution's language is among the strongest protections afforded pensions nationwide.
The litigation "was expected and underscores the difficulty the city faces in its efforts to put its pension plans on firmer footing," Fitch wrote in a special commentary Friday.
If the litigation succeeds and changes to the cost of living adjustments and employee contributions are struck down, the city would likely revert back to the lower, statutorily based payments written into state statutes because annual payments on an actuarially sound basis would rise dramatically, Fitch warned.
Fitch Ratings rates Chicago general obligation bonds A-minus with a negative outlook.
The city's separate police and fire finds weren't a subject of this year's legislation. For those funds, Chicago is facing a scheduled $550 million increase in annual in contributions under a prior state mandate to shift to an actuarially based payment in 2016.
"The city has not yet said how the increased pension costs will be accommodated, but Fitch Ratings believes they threaten to crowd out other governmental priorities and remain a formidable challenge to the city's financial equilibrium," Fitch warned.
The city's pension funds are collectively funded at a 35% level. The city's pension woes are exacerbated by those of its sister agencies and Cook County that all rely on the same tax base.
Emanuel issued a statement after the lawsuit's filing saying the city was ready to defend the reforms that were struck after negotiations with unions and had widespread union support.
The plaintiffs include AFSCME Council 31, the Chicago Teachers Union, the Illinois Nurses Associations, Teamsters Local 700 and more than a dozen retirees and current members of the municipal employees' fund. It names the fund and its board of trustees as defendants. They are represented by Freeborn & Peters.
Moody's Investors Service rates the city's GOs Baa1 with a negative outlook after a lowering the rating four levels over the last year. Standard & Poor's assigns a negative outlook to the city's A-plus rating.
The Chicago Municipal Employees fund carries $8.7 billion of unfunded obligations and has a funded ratio of 36.9%.
