PHOENIX - Legal and political processes must lead to pension fixes in Chicago, California, and around the country, said leaders of an advocacy group dedicated to public sector pension reform.
Members of the board of directors of the Retirement Security Initiative, a group launched in January, said on a conference call Friday that pension reform is the top issue affecting municipal government finances and that recent court decisions in Illinois and California could help create more clarity about how to address the mounting problem.
"We don't believe in kicking the can down the road another day," said former Utah state senator Dan Liljenquist. Liljenquist noted that the Illinois Supreme Court last month struck down the city's 2014 reforms to its municipal employees' and laborers' pension funds, and that Chicago Public School Teachers staged a one-day walkout Friday in part to protest failed negotiations between their union and the school system.
California also faces a huge challenge, Liljenquist said, grappling with an unfunded pension liability approaching $200 billion for the state alone. It is perhaps much more when including individual county and city retirement systems.
With its already tarnished credit rating at risk, Chicago faces a heightened sense of urgency to come up with a new reform plan following the Illinois Supreme Court's ruling. Fitch Ratings dropped the city to the lowest investment grade rating after the ruling. Moody's already rates the city junk and all four rating agencies assign a negative outlook over the weight of the city's $20 billion unfunded tab.
The court found the reforms to the city's municipal employees' and laborers' pension funds, which included benefit cuts, violate the state constitution's pension clause that assigns contractual rights to fund membership and protects benefits from impairment or diminishment. Illinois' clause is among the strongest protections built into a state constitution.
The court left open the possibility that a deal reached through a formal collective bargaining process and one that offers some new benefit to fund members in exchange for any detrimental changes could pass constitutional muster.
Initiative member and municipal restructuring specialist James Spiotto, a managing director at Chapman Strategic Advisors, said the decision "should be read as an encouragement to come together" for labor and the city to find a solution that preserves retiree benefits and the city's economic ability to pay.
Spiotto expects the ruling will spark discussions over passage of a constitutional amendment that could clarify and limit governmental pension rules and discussions over employee wage and benefits.
"I think there are a lot of ideas swirling," he said.
An agreement through the formal collective bargaining process offers the best option if laid out in a package that clearly outlines the benefits. "I think the Supreme Court should be more receptive to it," he said.
The courts could provide an avenue through some form of class action to bring retirees under the umbrella of an agreement as unions represent only current employees, he added.
While the city must now return to the drawing board at least it has more direction as to what can pass a legal test, said initiative member Lois Scott, a former banker and financial advisor who worked on the reform package during her tenure as Chicago's chief financial officer.
"We now have greater clarity" that will allow the city to "fine tune" its plan, Scott said. As a home-rule community, the city has broad revenue flexibility but must balance how much of the solution will fall on taxpayers.
Rating agencies and municipal market participants expect Chicago Mayor Rahm Emanuel to quickly reveal an alternative plan to shore up the funds which are headed toward insolvency in the next decade and have said it needs to be a "realistic" one. Scott said it's difficult to predict how the rating agencies will act but her advice to the mayor always was to take into consideration the opinions of rating agencies but not to let them govern the city's actions.
California is also in the midst of a legal process that RSI's leaders hope can pave the way for reform.
On March 7, the California Second District Court of Appeal reversed a Sept. 5, 2014 decision by the Los Angeles Superior Court in the case of Fry v. City of Los Angeles. The appeals court sided with the city's position that fire and police department pensioners do not have a vested right to a healthcare subsidy determined by the Board of Fire and Police Pension Commissioners, but that the city council instead retains that power.
The court of appeal has already denied a motion for a rehearing, but the case could be appealed to the California Supreme Court.
Former San Jose mayor and RSI board member Chuck Reed said that taking the Fry case and others to the state's top court could help to slowly "chip away at" what he considers an overly-broad interpretation of the so-called "California Rule," a decades-old understanding that the state constitution protects public sector employees from ever earning retirement benefits inferior to those they begin accumulating on their first days of work. Reed said that some combination of a constitutional amendment and a legal process will need to happen to get California on a sustainable track, because he does not expect the legislature to come up with any solutions.
"I don't think that there's a political process in California that is likely to yield anything significant," Reed said.
The RSI leadership stressed that a coming-together of stakeholders would be the best bet for pension reform, citing an Arizona reform deal inked in February that placed an age minimum of 55 years for pensioners to receive full benefits and split the cost of pensions 50/50 between employers and new employees.
A part of the bipartisan plan still requires voter approval in May, but provides a good roadmap for Chicago and other jurisdictions looking to make sustainable changes, RSI brass said.
"We have a good example in Arizona," Liljenquist said.