14114471388_f4b64191b8_zThis morning, the Illinois Supreme Court issued its much-anticipated opinion in Jones v. Municipal Employees’ Annuity and Benefit Fund of Chicago, unanimously striking down Public Act 98-641, the pension reform bill for the City of Chicago. For a detailed summary of the underlying facts and court rulings, see here and here. For our report on the oral argument in Jones, see here. And for the Supreme Court’s most recent two decisions on pension reform, see here (the state reform act) and here.

Jones revolves around two of the four pension systems created to serve employees of the City of Chicago – the Municipal Employees, Officers and Officials Annuity and Benefit Fund (“MEABF”) and the Laborers’ and Retirement Board Employees’ Annuity and Benefit Fund (“LABF”). Prior to the passage of Public Act 98-641, annuity payments under both funds were subject to 3% automatic annual increases, compounded annually. Employees contributed 8.5% of their salary, and the rest of the funding came from contributions from the City and investment returns on the funds’ assets.

Like the state pensions, the City pensions have long been seriously underfunded. As early as 1949, the Illinois Public Employees Pension Laws Commission noted the funds’ “large unfunded accrued liabilities.” As a result of the years-long underfunding, the Illinois Constitutional Convention of 1970 adopted the pension protection clause, which states: “Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.” The Convention’s apparent hope was that by providing that benefits could not under any circumstances be reduced, state and local government authorities would be forced to adequately fund the pensions.

Nevertheless, underfunding continued, with the City’s contribution levels at a fixed multiple of employee contributions, notwithstanding the magnitude of the funds’ liabilities. Currently, the MEABF and LABF are projected to become insolvent in 10 and 13 years, respectively.

Public Act 98-641 addressed the crisis in several steps. First, it required the City to make sufficient contributions to the funds to bring them both to 90% funding by 2055. If the City fails to make the required contributions, the funds have the right to certify the delinquent amounts to the State Comptroller, who is directed to deduct the missing funds from state grants due to the City. The Act gradually increases employees’ contributions, in steps of 0.5% per year, to 11% of salary, until the City achieves 90% funding, at which point employee contributions step back down to 9.75%. The previously guaranteed 3% annual increases are changed to the lesser of 3%, or half the annual unadjusted percentage increase in the Consumer Price Index. Increases are no longer compounded, and are eliminated completely in certain years.

Two lawsuits were filed, arguing that Public Act 98-641 violated the pension protection clause. The Circuit Court of Cook County agreed, striking down the statute in its entirety, and the direct appeal came to the Supreme Court.

In an opinion by Justice Mary Jane Theis for five members of the Court (Justices Burke and Freeman recused themselves), the Supreme Court affirmed the Circuit Court. The Court has little trouble concluding that the provisions of Public Act 98-641 “have the same impact” as the reforms unanimously struck down last year in In re Pension Reform Litigation. “Accordingly,” the Court held, “based on the plain language of the Act, these annuity reducing provisions contravene the pension protection clause’s absolute prohibition against diminishment of pension benefits, and exceed the General Assembly’s authority.”

The Court then turned to the two defenses offered by the City: (1) read as a whole, the Act offers members a net benefit by insuring that they would actually receive their benefits, as opposed to paper promises from bankrupt funds; and (2) the Act was a bargained-for exchange supported by consideration.

The “net benefit” argument failed at the outset, the Court found, because the provisions of the Act regarding funding methods weren’t a “benefit” under the constitution which could be netted out against payments. The Court has consistently held for forty years that the pension protection clause has nothing at all to say about legislative funding choices. Besides, any funding reforms adopted by this legislature could be altered or repealed entirely by some future legislature.

The City argued that without fundamental reform, City employees would be left with at best a theoretical right to benefits for which only the bankrupt funds were liable – a worthless promise. But it wasn’t a worthless promise, the Court found. City employees had an absolute right to the full amount of their benefits, not just whatever monies happened to remain in the funds when they went bankrupt: “Thus, the General Assembly and the City have been on notice since the ratification of the 1970 Constitution that the benefits of membership must be paid in full, and that they must be paid without diminishing or impairing them.” Although the Court never expressly says so, this passage suggests that there might be extreme circumstances someday in which the Court might be willing to order funding to enforce the employees’ “legally enforceable right.”

Nor could Public Act 98-641 be defended as a “bargained-for exchange” for consideration. The City argued that the Act had been the result of years-long negotiations with 31 City unions, and 28 of 31 had ultimately supported the deal. It was true, the Court commented, that City employees could “knowingly and voluntarily” agreed to modify their pension benefits in exchange for valid consideration. But the problem was, nobody was arguing that the discussions between the City and the unions were a collective bargaining process. Instead, the Court found, they amounted to nothing more than “legislative advocacy on behalf of any interest group.” Therefore, the Court left for another day the question of whether a Union could validly change its members’ pension rights through a majority-vote adoption of a new collective-bargaining agreement with a government employer.

Since Public Act 98-641 contains a broad non-severability clause, providing that if anything in the Act were struck down, the entire Act had to fall, the Court held that the pension reform act was void and unenforceable in its entirety.

Image courtesy of Flickr by Thomas’s Pics (no changes).