CHICAGO - A group of Chicago unions, employees and retirees
Participants and unions representing members of the Municipal Employees Annuity and Benefit Fund filed the lawsuit in Cook County Circuit Court.
The municipal employees' fund was one of two Chicago funds impacted by legislation approved earlier this year. Participants in the smaller laborers' fund are not party to the lawsuit.
The group seeks to block the Jan. 1 effective date of the legislation that cuts benefits and raises contributions. The complaint argues the changes violate the state constitution's protections against impairing or diminishing pension benefits.
"The constitution says clearly that pension benefits cannot be diminished or impaired, but that's exactly what this legislation does to the modest pensions earned by city workers and retirees," AFSCME Council 31 executive director Roberta Lynch said in a statement announcing the litigation.
Emanuel issued a statement saying the city was ready to defend the reforms that he previously said were struck after negotiations with unions and had widespread union support.
"We believe Senate Bill 1922 - which does nothing short of ensuring the future of 61,000 city workers and retirees - is also compliant with the Illinois constitution," Emanuel said. "Without this reform, these two funds will run out of money in just a matter of years, which is why we must defend this law to protect the future of our workers, retirees, and taxpayers."
The plaintiffs include AFSCME Council 31, the Chicago Teachers Union, the Illinois Nurses Associations, Teamsters Local 700 and more than a dozen retirees and current members of the municipal employees' fund. It names the fund and its board of trustees as defendants. They are represented by Freeborn & Peters.
The lawsuit labels the constitutional language "a straightforward promise that the pension benefits a public employee receives cannot be diminished or impaired." The average annual benefit for participants is $34,000 and most do not receive Social Security benefits.
The legislation calls for higher city and employee contributions and some benefit cuts, including a reduction in existing annual cost-of-living increases. The legislation imposes a five-year ramp up period in contributions to 2020, with city contributions growing a total of $750 million, when payments would reach an actuarially required contribution level that puts the funds on course to a 90% funded ratio in 40 years. Contribution levels were previously set in statute and often fall short of actuarially required levels.
The legislation includes a provision that gives unions the right to sue should the city fall short of its required contribution levels.
"Specifically, for those members of the MEABF who already have retired, Public Act 98-0641 unlawfully reduces the amount of the automatic annuity increases to which they otherwise are entitled" and current employees must "contribute more of their salaries toward their pensions only to suffer when they retire the injustice of the same reduced automatic annuity increases that current retirees will suffer immediately," the lawsuit reads.
"Those are the very diminishments and impairments of pension benefits that the Pension Protection Clause forbids," it continues.
The city has blamed its $19 billion of unfunded pension obligations for its credit rating deterioration over the last two years, because the obligations weigh on the city's balance sheet and offset strides toward structurally balancing its budget.
Chicago earlier this year laid out in stark terms the risks posed by its steep credit deterioration and hazards should it slip further. The city - after multiple recent downgrades — is as little as one more downgrade away from potential swap termination event.
Moody's Investors Service in March knocked Chicago's GO rating to Baa1 with a negative outlook from A3 with a negative outlook. That followed the agency's three-notch downgrade from Aa3 in July 2013.
In November 2013, Fitch Ratings downgraded Chicago GOs three notches to A-minus from AA-minus and assigned a negative outlook. In September 2013, Standard & Poor's revised its outlook to negative from stable while affirming the city's A-plus rating. Chicago has paid steep penalties to borrow amid investors' concern about the city's pension mess.
Separately, the city is facing a $550 million spike in contributions to its police and firefighters' funds in 2016 under a prior state mandate but is hoping for action on those plans in a future state legislative session.
City efforts have stalled as police and fire unions await an Illinois Supreme Court review of changes made to the state's retirement system in December 2013 to determine whether they pass constitutional muster. A lower court recently overturned the state changes.
If the Illinois Supreme Court agrees, unions would gain the edge in reform negotiations. Briefs are due to the state's high court early next year. The state is arguing it acted within its police powers to save the state retirement system and avoid deep service cuts through the reforms and that consideration was offered for the cuts by lowering employee contributions.
The city pension changes remove the threat of the funds' looming insolvency but any notable reduction in the burdensome size of their liabilities is years off, Fitch Ratings said previously.
The overhaul is considered a good step, but would have only a mild impact on the city's massive unfunded obligations in the early years, Moody's cautioned in its special commentary at the time of passage. "Even with reform, pensions will continue to weigh heavily on Chicago's credit quality," analysts wrote.
The Chicago Laborers' fund reversed a years' long record of deterioration with its unfunded obligations shrinking slightly to $1.04 billion from $1.06 billion and the funded ratio improving to nearly 57% from 55%. The fund saw a rate of return of 15.8% compared to an assumed rate of 7.5%.
The Chicago Municipal Employees fund deteriorated slightly with $8.7 billion of unfunded obligations from $8.6 billion with its funded ratio falling to 36.9% from 37.2%. The fund saw a 15.9% rate of return while assuming a 7.5% rate. The results don't recognize the reforms. Both funds are headed toward insolvency absent any changes. The reforms would put the funds on track to reach a 90% funded ratio in 2055 through higher contributions and benefit changes.
