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Supreme Court Throws Out Chicago Pension Reform Again

April 6th, 2016

Jones v. Municipal Employees’ Annuity & Benefit Fund of Chicago, 2016 IL 119618

The Illinois Supreme Court has thrown out the legislatively enacted pension reformed aimed at two Chicago pension funds.  The matter before the Court was whether Public Act 98-641 (Act), designed to address Chicago’s pension issues with respect to Chicago’s Municipal Employees’ Annuity and Benefit Fund (MEABF) and Laborers’ Annuity and Benefit Fund (LABF) violated the pension protection clause of the Illinois Constitution.  The Court’s decision noted (1) that both MEABF and LABF are projected by many to be insolvent in the next several years and (2) that the Act was a result of negotiations between the City and 28 of the 31 unions representing City employees in those two funds.   Nevertheless, the Court ruled that the Act violated the pension protection clause of the Illinois Constitution.  The 5-0 opinion affirmed the circuit court of Cook County’s decision declaring the Act unconstitutional and unenforceable in its entirety.

 Prior to the Act, participants in both retirement systems contributed 8.5% of their salaries toward their pensions.  Among other benefits, both systems provided for 3% compounded automatic annual increases (AAI) beginning after members completed one full year of retirement.  The City funded the retirement systems primarily from property tax proceeds based on a multiple of employee contributions.  The fixed tax multiplier established in the pension code was not sufficient to meet the projected benefit payments required of the MEABF and LABF. With respect to the fiscal health of the funds, Justice Theis wrote, “It was undisputed that if the funds remained on the same trajectory, they would continue to pay out more in benefits than they received in contributions and investment returns, leading to a path of insolvency.”

 To address the fiscal conditions of the MEABF and LABF, the Act increased the 8.5% employee contribution by .5% each year beginning in 2015 until their contribution reached 11% of their salary.  The Act also reduced the automatic annual increases (AAI) from 3% compounded to 3% or half the Consumer Price Index, delayed the time when a retiree would first become eligible for an AAI and eliminated the AAI altogether in specific years.  Under the Act, the City’s funding requirement was increased annually leading to actuarially based funding beginning in 2021 to bring the fund to a 90% funded ratio in 2055.  To ensure payment of the statutory funding, the Funds were given the authority to certify delinquent amounts to be withheld and deposited into the Funds from the State Comptroller and also initiate a mandamus proceeding with the court to order a reasonable payment schedule. The new statutory funding enforcement mechanisms were significant in light of the City’s argument that under Article 22, of the Pension Code, the debts of the pension funds were not to be deemed a debt of the City.  Therefore, the new funding mechanism conferred a net benefit to participants by saving them from insolvency.

 The Court ruled the City’s net benefit argument was inconsistent with the Illinois Constitution which mandates members of the Funds have “a legally enforceable right to receive the benefits they have been promised, not merely to receive whatever happens to remain in the Funds.”  The Court reiterated “the clause was intended to force the funding of the pensions indirectly, by putting the state and municipal governments on notice that they were responsible for those benefits.” McNamee v. State, 173 Ill. 2d 433 (1996)

 As to the City’s argument the Act represented a bargained for exchange with 28 out of 31 unions, the Court said, “nothing prohibits an employee from knowingly and voluntarily agreeing to modify pension benefits from an employer in exchange for valid consideration from the employer.” Kraus v. Bd. of Trustees of the Police Pension Fund, 72 Ill. App.3d 833, 849 (1979).  However, even taking the facts as presented by the City as true, the Court held members of the Funds did not bargain away their constitutional rights in the process.  The Court concluded the unions were not acting as agents in the collective bargaining process but as an advocacy group due to the fact that the individual members have done nothing that could be said to have assented to the new terms provided for in the Act.

 In conclusion, the Court ruled that given the failure of the City’s net benefit argument combined with the resulting diminishment not resulting from valid collective bargaining, the reduced automatic annual increases (AAI) and increased employee contributions required by the Act amounted to a diminishment or impairment of benefits in violation of the pension protection Clause in Article XIII, Section 5 of the Illinois Constitution.  The Court therefore held the Act unconstitutional in its entirety.