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Thursday, July 30, 2015

Court Deals Blow to Pension Reform Legislation

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


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