Fri Jul 24, 2015 3:51pm EDT
Reuters
UPDATE 3-Judge rules Chicago pension reform law is unconstitutional
By Karen
Pierog
CHICAGO, July 24 (Reuters) - A law aimed
at shoring up two of Chicago's financially shaky public worker retirement
systems violates pension protections in the Illinois constitution, a judge ruled
on Friday.
The ruling is a setback for Mayor Rahm Emanuel who has repeatedly said he
will not raise taxes without pension reforms. It also gives Illinois' public
labor unions more leverage to resist pension cuts.
In a written opinion, Cook County Circuit Court Judge Rita Novak rejected
Chicago's arguments that the 2014 law results in a net benefit because it will
save the municipal and laborers' retirement systems from insolvency and that the
law was backed by a majority of affected labor unions. She also took issue with
Chicago's contention that it was not legally on the hook to pay
pensions.
"The city's argument, premised on the notion that participants have no right
vis a vis their employer to expect payment of their pension benefits, is
fundamentally at odds with the supreme court's teachings," Novak wrote.
Pension payments are devouring bigger chunks of budgets for Illinois and
Chicago and both face crippling spending cuts or big tax increases if those
payments are not reduced. Illinois has the worst-funded pension system among
U.S. states along with a $105 billion unfunded pension liability, while
Chicago's unfunded liability for its four systems is $20 billion.
The city contended that without the law, the two pension systems would run
out of money within 10 to 13 years and that under Illinois law, payments to
retirees would be the obligation of the pension funds, not Chicago. Labor unions
and retirees who sued over the law claimed it violated the state constitution's
pension clause.
Chicago will appeal Novak's ruling up to the Illinois Supreme Court,
according to a statement from the city's top staff attorney.
"While we are disappointed by the trial court's ruling, we have always
recognized that this matter will ultimately be resolved by the Illinois Supreme
Court," said Stephen Patton.
SECOND WIN FOR UNIONS
The law, which took effect on Jan. 1, requires Chicago and affected workers
to increase their pension contributions and replaces an automatic 3 percent
annual cost-of-living increase for retirees with one tied to inflation. Those
increases are also skipped in some years.
Novak's ruling also cited the Illinois Supreme Court's sweeping decision in
May that found public sector workers have iron-clad protection against pension
benefit cuts. That decision came in litigation over a 2013 law that reduced
benefits for workers in state retirement systems.
Anders Lindall, a spokesman for the American Federation of State, County and
Municipal Employees Council 31, called Friday's ruling a victory for city
workers and retirees who receive pensions of $32,000 a year on average.
Some of the $345 million of tax-exempt bonds Chicago sold last week traded
lower in the wake of the ruling, widening the spread over Municipal Market
Data's benchmark triple-A yield scale to a hefty 275 basis points for bonds due
in 2039 from an original spread of 253 basis points.
In documents for that bond sale, Chicago warned that the city's already-low
credit ratings could fall further if the law is voided. Moody's Investors
Service in May lowered the city's rating to "junk." Standard & Poor's
earlier this month cut the rating to the low investment-grade level of BBB-plus
because of a chronic structural deficit.
S&P said on Friday it will "likely" lower Chicago's rating within the
next six months "if the city fails to incorporate pension contributions in a
structurally balanced manner."
Arlene Bohner, a Fitch analyst, said a ruling by the state supreme court
ultimately tossing out the law "could very well lead to a downgrade." Moody's
called Novak's ruling "credit neutral" at this point.
(Additional reporting by
Karl
Plume in Chicago; editing byChizu
Nomiyama and Matthew
Lewis)