The Illinois Supreme Court ruled Thursday that an earlier pension reform law for the $4.6 billion Chicago Municipal Employees’ Annuity & Benefit Fund and the $1.35 billion Chicago Laborers’ Annuity & Benefit Fund is unconstitutional, upholding the decision reached in a Cook County Circuit Court in July.

The law, signed by then-Gov. Pat Quinn on June 9, 2014, and which took effect Jan. 1, 2015, raised employee and employer contributions and reduced retiree cost-of-living adjustments for participants in the two plans.

Siding with active and retired city workers who argued the law violated the state’s constitutional clause that pension benefits “shall not be diminished or impaired,” Cook County Circuit Court Judge Rita M. Novak ruled in July that the pension reform law was unconstitutional.

Chicago appealed Ms. Novak’s ruling to the state Supreme Court shortly after.

In oral arguments before the Supreme Court in November, Stephen Patton, the city’s corporation counsel, said the law “avoids this looming disaster for the (Chicago Municipal Employees’ Annuity & Benefit Fund and the Chicago Laborers’ Annuity & Benefit Fund) and their participants by massively increasing the city’s contributions and imposing a new obligation that the city must pay each year whatever amount the funds’ actuaries determine necessary to ensure that the funds are fully funded and that all pensions will be paid.”

The Supreme Court ruled unanimously, however, that benefits could not be altered.

“The fact that some of (the law’s) provisions are directed at improved funding cannot overcome the fact that constitutional rights of employees and retirees would be violated,” said Justice Mary Jane Theis, writing for the court. “The pension protection clause does not guarantee any particular method of funding, but, rather, guarantees the right to be paid.”

Justices Anne Burke and Charles Freeman did not take part in the decision.

The municipal employees and laborers pension funds, with roughly $7 billion and $720 million in unfunded liabilities, respectively, were projected to become insolvent in 2026 and 2029.

Chicago’s combined pension contributions to the municipal and laborers’ funds were projected to rise by roughly $90 million to $266.7 million in 2015, payable in 2016, under the law.

The lawsuit did not address participants in the other two city pension funds — the $2.6 billion Chicago Policemen’s Annuity & Benefit Fund and $1 billion Chicago Firemen’s Annuity & Benefit Fund.

Chicago faces roughly $20 billion in unfunded liabilities across its four pension funds. Moody’s Investors Service downgraded Chicago’s credit rating to junk in May, citing pension concerns. Matt Butler, assistant vice president at Moody’s Investors Service, said on Thursday the ratings agency will continue to assess Chicago’s attempts at pension reform.

Union officials praised the Supreme Court’s ruling and faulted politicians for underfunding the systems.

“Today’s ruling strengthens the promise of dignity in retirement for those who serve our communities, and reinforces the Illinois Constitution, our state’s highest law,” said the American Federation of State, County and Municipal Employees Council 31, the Chicago Teachers Union, the Illinois Nurses Association and Teamsters Local 700 in a joint e-mailed statement. “Politicians caused the pension debt by failing to set aside adequate contributions, in effect borrowing from future retirees to avoid raising revenue or cutting spending instead.”

In an e-mailed statement, Mayor Rahm Emanuel said: “Though disappointing, this ruling does not change my commitment to ensuring employees and retirees have a secure retirement without placing the full burden on Chicago taxpayers. While I believe (the law) was the right pension reform plan for retirees and taxpayers, my administration will continue to work with our labor partners on a shared path forward that preserves and protects the municipal and laborers’ pension funds, while continuing to be fair to Chicago taxpayers and ensuring the city’s long-term financial health.”

Jim Mohler, executive director of the municipal employees fund, and Michael Walsh, executive director and chief investment officer of the laborers fund, could not immediately be reached for comment.

In May, the Supreme Court ruled that a state pension reform law — which reduced cost-of-living adjustments, capped pensionable salaries and raised retirement ages — was unconstitutional. Ms. Theis cited that ruling, along with an earlier ruling on retiree health-care benefits, in Thursday’s decision.

Source: Pensions & Investments