Chicago in tough battle to overturn ruling on pension reforms

City has US$20 billion unfunded pension liability
By Karen Pierog
|hrreporter.com|Last Updated: 11/17/2015

CHICAGO (Reuters) — Cash-strapped Chicago faces an uphill fight before the Illinois Supreme Court on Tuesday to try to salvage a law aimed at boosting funding and lowering costs for two of its retirement systems.

The state’s highest court in May tossed out a 2013 law that reduced retirement benefits for state workers to ease Illinois' huge $105 billion unfunded pension liability. All seven justices agreed that the Illinois Constitution protected state workers against pension benefits cuts.

"It's tricky to predict court rulings, but I'd bet the court will stick to its guns," said Stuart Buck, who tracks public pension litigation for the Arnold Foundation, referring to Chicago's case.

Buck noted that the court in its May ruling determined the state’s fiscal crisis was no excuse for breaking a contract protected by the Illinois Constitution, and that the state legislature was responsible for providing sufficient funding.

In oral arguments on Tuesday, Chicago, which has a US$20 billion unfunded pension liability, will fight to overturn a Cook County Circuit Court judge's July decision voiding a 2014 state law that provided pension relief.

Judge Rita Novak rejected the city's argument that the law provided a net benefit by saving the municipal and labourers' retirement systems from insolvency in the next decade.

The judge also rejected the city’s argument that the law should stand because it was backed by a majority of labour unions. The law required Chicago and affected workers to increase their pension contributions and replaced an automatic 3 percent annual cost-of-living increase for retirees with one tied to inflation. The increase would be skipped in some years.

Labour unions and retirees filed challenges to the law in December 2014. The plaintiffs argue Chicago's "net benefit" theory ignores the state Constitution’s ban against any reduction in pension benefits.

Chicago contends the law provides a new actuarial funding guarantee.

"The act does not 'diminish' or 'impair' the 'benefits' of 'membership' in the funds — it preserves and protects them,” the city stated in a brief.

Moody's Investors Service, which dropped Chicago's bond rating to "junk" in the wake of the May state Supreme Court pension ruling, said a rejection of the 2014 law would have negative implications.

"This would exert additional negative credit pressure on Chicago’s credit quality because it would likely remove all flexibility to reduce unfunded liabilities through benefit reform and raise the probability of plan insolvency,” Moody's said in a report.

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