Judge finds Pension Reform Law Unconstitutional

Judge finds Pension Reform Law Unconstitutional

On July 24, 2015, a Cook County Judge Rita Novak ruled that the plan to change city workers pensions, or the “Pension Reform Bill” was unconstitutional and that the Constitution of Illinois provides that public pensions “shall not be diminished or impaired.”[1] Its provisions include an increase in retirement age for employees of the city hired after January 1, 2011, a change in the cost of living adjustment, an increase in employee contributions and prohibiting the use of pension funds to cover city health care costs until 2017. This bill was signed into law in June 2014.

Basically Mayor Rahm Emanuel had planned to use the changes to roll back benefits in order to save money. Mayor Emanuel intended to bring change in state law reducing municipal worker pension benefits in exchange for a city guarantee to fix their underfunded retirement systems.

However, the said ruling goes contrary to Mayor Emanuel’s plan to bring changes to pension policy and which means that the city pensioners will receive the full benefits they were pledged when they began working and that the city government (and city taxpayers) will be on the hook to pay for them. Judge Novak’s ruling mirrors the Illinois Supreme Court’s recent decision over the parallel issue which stated that lawmakers are constitutionally prevented from reducing public workers’ pensions. While doing so, Judge Novak rejected Chicago’s contention that the 2014 law will incur net benefits as it tends to the municipal and laborers’ retirement systems from insolvency.

The vital concern behind bringing the change to the pension structure was that it engulfs a larger share of government funds in Illinois and Chicago. Another reason is that Illinois tends to possess the worst funded pension schemes, owing a sum of $105 billion unfunded pension liability, while Chicago bears the same in an amount of $20 billion. The City thus contended that without the law, the two pension systems would run out of money within 10 to 13 years. The issue here revolves around these underfunded pensions and as to how to restore their financial health.

The ruling in essence found that any pension fund member could challenge an agreement to change pension benefits, even if backed by a union agreement. At the same time, the ruling would make it all but impossible to reduce benefits since every member of the fund would have to individually comply. However, Mayor Rahm Emanuel’s administration expressed its disappointment stating that it will appeal against Cook county judge’s decision in Illinois Supreme Court.

[1] See Memorandum Opinion and Order at: http://www.nytimes.com/interactive/2015/07/24/business/document-chicago-pension-ruling.html