10112994543_c43ab3036dDuring its just-ended November term, the Illinois Supreme Court heard oral argument in Jones v. Municipal Employees’ Annuity and Benefit Fund of Chicago, a sequel of sorts to In re Pension Reform Litigation from earlier this year. This time, the Court is reviewing a decision from the Circuit Court of Cook County striking down SB 1922, a bill aimed at saving the Chicago public employees pension system. Based on the distribution and content of the Court’s questions, it appears likely that the Chicago pension fix will suffer the same fate that the statewide fix did earlier this year. Our two-part data analytic preview of the oral argument in Jones, including a detailed summary of the underlying facts and holdings, is here and here.

Counsel for the City began the argument by saying that the case hinges on two undisputed facts – first, the funds will inevitably go bankrupt in the relatively near future absent some sort of fix; and second, the Act under review dramatically increases the City’s employer contributions and for the first time imposes a legal obligation to fund the system on the City (rather than the funds). Counsel argued that the case presents an issue not before the Court in In re Pension Reform. There, counsel argued, the State conceded that the Act impaired benefits. Here, the City argues that the Act benefits employoees and retirees by saving and stabilizing the funds. Counsel argued that no prior case had involved legislation imposing a substantial new funding obligation. Justice Thomas asked how the promise of funding matters when the Constitution guarantees that benefits must be paid. Isn’t that promising to do what the Constitution already guarantees? Counsel responded that the Constitution does not in fact guarantee funding.   Instead, the Pension Protection Clause tried to prod the legislature to fund pensions by protecting benefits. According to counsel, it was undisputed that before the Act, only the funds were legally obligated to pay the funds’ obligations. Justice Theis noted that the Court has always held that the purpose of the Clause was to ensure receipt of benefits rather than controlling the political branches’ funding decisions. But the City appeared to argue that there was never an obligation to pay for the benefits. How did the City reconcile those points? Counsel answered that there was an obligation to pay, but the issue was whose obligation. Previously, the obligation was only on the funds. Justice Theis asked whether the City was contending that the Clause no longer applies if the funds run out of money. Counsel responded that it depends on the pension contract. The Pension Protection Clause protects the rights and obligations found in the Pension Code. Most funds have a provision that somebody other than the fund backstops the fund’s obligations; but that has not historically been true with the City’s employee funds. Even if the Court accepted the plaintiffs’ arguments, counsel insisted, both employees and retirees were obviously better off after the Act – that was proven by the fact that the fund trustees and twenty-seven of the thirty-one impacted unions supported the City. Counsel argued that absent the Act, participants’ only option was a highly uncertain lawsuit to force funding once the funds were on the verge of default. Justice Thomas noted that the Court was dealing with a statute, not a collective bargaining agreement – any agreement is merely part of the history of how the statute came to be enacted. But if the statute is clear and unambiguous, what did the history matter? Counsel answered that one basis for reversing was finding that the changes in benefits were a bargained-for exchange for consideration. Justice Thomas asked whether the City was arguing that all affected parties had consented. Counsel said no, but that didn’t foreclose the bargain-for consideration argument. All 75,000 of the affected employees and retirees would never agree to anything. Counsel concluded by arguing that even if the Pension Protection Clause is an individual right, there was nothing preventing the Court from applying a reasonable and common sense approach to allow unions to negotiate a fix on their members’ behalf.

Counsel for the fund trustees was next. According to counsel, overwhelming evidence in the record showed that the funds were facing bankruptcy. The Act benefits the funds by insulating them from investment shocks, as well as by making the City the guarantor of the funds’ obligations. The imposition of that obligation is a significant benefit to all participants, counsel argued, as was the mandamus action authorized by the Act. Justice Theis asked whether future legislation could modify all these changes. Counsel said no, the funding obligations were now a benefit of pension system membership, protected by the Pension Protection Clause. Justice Theis asked whether the Constitution protects this kind of thing, and counsel said yes, that was the legislature’s intent in passing the Act. Counsel concluded by arguing that the funds could not invest their way out of their problems, and without the Act, the unfunded liabilities would continue to grow.

Counsel for the funds briefly concluded, arguing that the Act confers security and certainty. Without the City’s guarantees, the funds can’t raise taxes, can’t increase contributions – they can’t raise any funds at all.

Counsel for the first group of plaintiffs was next. He argued that there was no dispute that members would receive smaller pensions under the Act. According to counsel, the Act was the result of years where employer contributions hadn’t matched the funds’ obligations. Now that the result of that has become intolerable, counsel argued, the City didn’t want to pay – but that’s exactly the option the Pension Protection Clause bars. Counsel argued that the City’s position was merely an end run around In re Pension Reform Litigation. Setting aside money to pay for something already guaranteed by the Constitution was not a benefit, counsel said. The City says this time around, the General Assembly really means it, according to counsel – but that rings hollow too, since the Act allows courts to change the funding schedule for the same reasons the Act had become necessary in the first place. Chief Justice Garman asked whether unions could bargain for diminishment in return for some sort of guarantee. Counsel answered that the rights involved were individual, and would have to be modified individually. Chief Justice Garman commented that then it’s really impracticable for individual benefits to ever be changed, even with consideration. Counsel answered that the City could have negotiated something to individuals an opt-in choice, but those would have to be fair contracts. No participant in the funds was present for any negotiation, and that City offered no evidence, according to counsel, that the union representatives had authority to represent their members in the discussions, let alone retirees. Counsel argued that no union has taken a position on the legislation as ultimately enacted, so there was no basis for finding an agreement. Counsel concluded by arguing once again that putting aside money to pay for benefits already guaranteed wasn’t a benefit within the meaning of the clause.

Counsel for the second group of plaintiffs was next, arguing that this case involved the same issues and arguments, and should involve the same result, as In re Pension Reform Litigation. Counsel argued that the City had made no employer contributions at all for the years 2000-2006, but employees still had to pay the same withheld contributions. Counsel claimed that the City had conceded that it couldn’t accomplish this result through a Collective Bargaining Agreement. Counsel concluded by noting that at any time in the past ten years, the trustees could have gone to court to force City contributions, but they had failed to do so.

Counsel for the City concluded in rebuttal, arguing that Justice Thomas’ question about the plain language of the Act begged the real question – whether an Act giving overwhelming benefits to participants violated the Pension Protection Clause. Justice Thomas asked what the “overwhelming benefit” was. Counsel answered that the benefit was billions of dollars to pay benefits as they came due. Justice Thomas asked whether that benefit was merely the result of the practicalities of where the funds are today, and didn’t the Pension Protection Clause already grant the same benefit? Counsel answered that the plaintiffs’ position proceeds from the false assumption that there is some obligation to fund the funds. According to counsel, the Clause says that employees get the benefit of the bargain that was on the books when they were hired. At all relevant times, the terms said that the funds themselves – not the City – were obligated to pay benefits. Justice Theis asked whether the City was arguing that employees should have known from the beginning that benefits might not be there. Counsel answered that funding was adequate until about ten years ago. The Pension Code says that no contributions were required when the funds were overfunded, which they were until about ten years ago. Did the parties know that the provision saying only the funds were liable was inadequate? No, counsel argued, but that was neither a breach of contract nor unconstitutional. Justice Thomas asked whether the Act means that all parties will get less than originally promised. Counsel answered no, it depends on the circumstances. According to counsel, it would be ironic if the Court declared that adequate funding – exactly what the framers of the Constitution were trying to cause by guaranteeing benefits – was unconstitutional. Justice Thomas asked whether there was anything else the General Assembly or City could have done to make sure funding was adequate aside from the Act. Counsel said no, but that wasn’t issue before the Court. Counsel argued that the only real alternatives were the Act – or fund bankruptcy in 10-13 years. Justice Thomas posed a hypothetical – in ten to thirteen years, the funds are bankrupt. Are the pensioners any less entitled to what they were promised? Counsel responded that the promise to retirees had a limitation. Justice Thomas asked whether retirees would have any recourse at that point to ensure they were paid. Counsel said that the City had been asking the plaintiffs what their alternative is. The only response has been a possible uncertain lawsuit to force funding once the funds were on the edge of bankruptcy. Counsel insisted that participants are better off with the Act than with the results of a speculative and uncertain lawsuit. Chief Justice Garman asked whether the City was saying that impairment is separate from funding. Counsel said it depends on the circumstances of a particular fund. The Clause protects benefits of membership in the retirement system. To define those “benefits,” one looks at what the legislature has put in the Pension Code. In most cases, that includes a guarantor, but these funds don’t have such a provision. Counsel concluded by arguing that the true threat going forward isn’t reducing benefits, it’s that the money simply won’t be there.

We expect Jones to be decided in three to five months.

Image courtesy of Flickr by Catarina Oberlander (no changes).