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Mixed Ruling on Chicago Retiree Healthcare

CHICAGO – A court ruling Thursday offered a mixed outcome for Chicago's effort to phase out most retiree healthcare subsidies.

Cook County Circuit Court Judge Neil H. Cohen concluded that employees hired before Aug. 23, 1989 enjoy a constitutional right to the subsidy to cover healthcare costs during retirement, a benefit long provided by the city. That's a blow to the city. Cohen did not specify the amount or nature of the protected subsidy.

What and how much are the pre-1989 fund members entitled to?

"That's the next big fight," said one market participant following the case.

Employees hired after that date don't enjoy the same protections, because of the statutes that were in place at the time of their hiring, which set a time limit on the subsidy. Cohen's dismissal of several counts and his conclusion regarding later hires represent a victory for the city.

"We are pleased that the judge recognizes their right to constitutional protection and it begs the question of what the terms that are being protected are but we are certainly concerned for those people hired after Aug. 23, 1989," said Clint Krislov, of Krislov & Associates, who represents the fund members who filed the lawsuit. "The city wanted to stamp us out entirely and they were not successful."

Krislov put the number of employees hired before the 1989 cutoff at about 20,000. Krislov said some hired after that date whose subsidy would not be protected under Cohen's ruling won't qualify for Medicare.

Krislov said he would appeal and seek a preliminary injunction. The city did not immediately issue a comment on the ruling and whether it would appeal.

The case ultimately is expected to land before the Illinois Supreme Court.

Fund members filed the litigation in 2013 to challenge Chicago Mayor Rahm Emanuel's efforts to phase out most retiree healthcare subsidies – often referred to as other post-employment benefits -- which had cost the city more than $100 million annually and were on the rise. The funds are also named as defendants.

The city has boasted of the positive impact of its efforts on the city's balance sheet because it reduces both the annual budgetary obligation and the unfunded liability.

The lawsuit argues the benefits are protected by the state constitution's pension clause and that the city is seeking to breach its contract with fund members.

The ruling Thursday came in response to the city and pension funds' filing of a motion to dismiss. Cohen heard oral arguments on July 6.

A status hearing is set for Aug. 11. The city could seek to settle the case, offering some sort of payout to compensate for the lost subsidies to resolve the battle and obtain more clarity in financial planning going forward, or the litigation could go on.

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's 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 in place at the time employees were hired.

Emanuel's move to phase out most retirees' healthcare subsidies followed a city-commissioned report that warned 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 act, which the city argued would provide an affordable option. The city's retiree healthcare subsidies have been the subject of litigation and various temporary settlements for 26 years and the suit seeks a permanent solution for participants.

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 retirees in the following year.

The city's recently released 2015 certified annual financial results showed a reduction in the unfunded OPEB liability to $781 million from $965 million.

The city's OPEB liabilities are separate from $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 pension 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 larger municipal employees' fund. Both are headed toward insolvency in the next decade.

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