Last Friday, a Cook County Circuit Court judge dealt a major
blow to the State’s pension reform efforts. Judge Rita M. Novak declared recent
pension reform legislation unconstitutional, likely putting the final nail in
the coffin of the State’s most recent efforts to solve its pension crisis. This
decision comes on the heels of a major ruling by the Illinois Supreme Court
invalidating another piece of pension reform legislation. As a result of these
rulings, many pension funds now find themselves on the brink of insolvency,
with some projected to go broke within a decade.
In the case decided Friday, the court considered the constitutionality of Public
Act 98-641. That legislation amended the way that two pension funds were
financed. The funds, the Municipal Employees Annuity and Benefit Fund and the
Laborers Annuity and Benefit Fund of Chicago, provide pensions to employees of
the City of Chicago. Currently, those funds provide for annual pension payment
increases of three percent. The legislation decreased the amount of these
annual increases. It also required both employers and employees to increase
their pension contributions.
Members of these pension funds argued that this legislation
was unconstitutional because it violated the Pension Protection Clause of the
Illinois Constitution. The Pension Protection Clause states that pension
benefits cannot be “diminished or impaired.” In its decision last May, the
Illinois Supreme Court held that this prohibited the General Assembly from
enacting legislation that eliminated annual increases to pension benefits and
capped the amount of pension benefits that a pensioner could receive. Since
this legislation, the Court held, would diminish the benefits that pensioners
had been promised, it was in violation of the Pension Protection Clause.
Similarly, in the case decided on Friday, Judge Novak held
that Public Act 98-641 was unconstitutional because it too diminished the
amount of pension benefits a pensioner could receive through its elimination of
annual increases to pension benefits. She rejected the pension funds’ argument
that this legislation actually provided a net benefit to the pension fund
members, as it required the City of Chicago, for the first time, to make
pension contributions. Judge Novak held that this benefit could be taken away
at any time, and therefore would not provide the type of permanent guarantee
that pension benefits would not be diminished that the Pension Protection
Clause guaranteed.
So, what are the consequences of this decision? In the short
run, we can expect an appeal. The chances of this appeal succeeding seem slim,
however. Judge Novak’s reasoning in Jones tracked the Supreme Court’s May
decision closely. She noted that the facts in Jones were similar to those in
the case considered by the Supreme Court, and therefore warranted a similar
outcome. Based on the similarities in the facts in Jones to the case considered
by the Supreme Court, it seems unlikely that Judge Novak’s decision will be
overturned.
In the long run, this decision shows that decreasing the
benefits that pensioners receive will be almost impossible. The court made it
clear that the Illinois Constitution prevents the General Assembly from
decreasing pension benefits in almost any circumstance. Creative legal
arguments on the part of the pension funds were not enough to change this. This
almost certainly means that pension shortfalls will have to be made up by
employers. Local governments should prepare themselves for increased pension
contributions in the coming years.
If there is one lesson to be learned from this case, it is
that once pension benefits are promised, they are almost impossible to take
away. This has resulted in huge financial problems for many local governments,
with the City of Chicago being the most prominent example.
Post originally authored by Matthew DiCianni, Ancel Glink
