Today the Illinois Supreme Court is expected to rule on the constitutionality of a 2014 state law that overhauled two of the city’s pension funds which cover most city employees and non-teacher employees of Chicago Public Schools. It’s a decision that could not only significantly impact the city’s annual contributions to the funds, but also its ability to borrow in the future.
When Moody’s and Fitch downgraded the city’s credit rating on its outstanding debt last year, both credit agencies indicated that if the IL Supreme Court ruled P.A. 98-641 unconstitutional, additional downgrades would be likely.
That’s because the law modified required contribution and benefit amounts for the Municipal Employees’ Annuity and Benefit Fund of Chicago (MEABF) and the Laborers Annuity and Benefit Fund of Chicago (LABF). Without the changes, the city projected both funds will become insolvent in 11 to 14 years.
The law was promoted as a way to address the underfunding and projected insolvency of the two funds by increasing the city’s and employees’ annual share into both funds, while decreasing (and skipping altogether in some years) the automatic annual increases, or AAIs, to beneficiaries.
When then-Gov. Pat Quinn signed the law, MEABF was 36.9% funded and expected to become insolvent by 2026. LABF was 56.7% funded and projected to be insolvent by 2029.
To mitigate those concerns, the law provides for annual 0.5% increases to employees’ required contribution (currently at 8.5%) until their portion reached 11% in 2019. Once the pensions reach a 90% funded ratio, the rate would go down to 9.75%.
It also amends the multiplier the city uses to calculate its annual contributions, by ramping up the formula, so payments are based on getting both pension funds to a 90% funded ratio by 2055. Under the funding ramp, the city’s portion to MEABF and LABF will grow by an average of 22% each year until reaching an estimated contribution of $622.9 million in 2020.
In December 2014, shortly before the law was to take effect, two lawsuits were filed in Cook County Circuit Court by participants in the two funds. They sought an injunction, arguing the AAI changes violate the pension clause of the state’s constitution, which states, “Membership in any pension or retirement system of the State, any unit of local government […], shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”
On July 24, 2015, a Cook County judge ruled the law unconstitutional, and the city appealed the decision to the state’s highest court.
The city has argued that the law doesn’t violate the Pension Clause of the state constitution because it provides a “net benefit” to the funds’ members, because without it, both funds could become insolvent in the near future.
If the court rules that the law is unconstitutional, the city’s annual payments to fund MEABF and LABF could revert to the prior, lower levels based on the old multiplier formula, which the city has argued is insufficient to cover payouts to retirees.
Today’s expected ruling comes eight months after the state’s high court ruled a seperate 2013 state pension reform bill was unconstitutional.