Illinois Supreme Court to Expedite Hearing of Reforms to Chicago Municipal and Laborers’ Pension Funds

August 27, 2015

The Illinois Supreme Court has agreed to an expedited hearing on the constitutionality of reforms to the City of Chicago’s Municipal and Laborers’ Pension Funds with oral arguments now scheduled for November. The City faces uncertainty to preserve these reforms.

On June 9, 2014, former Illinois Governor Pat Quinn signed Public Act 98-0641, making changes to pension funding and benefit levels for current retirees and employee members of two of the City of Chicago’s four pension funds, the Municipal and Laborers’ Funds. Its provisions went into effect January 1, 2015.

In December 2014, two lawsuits were filed in the Cook County Circuit Court that challenged the constitutionality of the pension reforms for the Chicago Municipal and Laborers’ funds. The plaintiffs were also seeking an injunction on the implementation of the provision of the law that went into effect on January 1, 2015. However, after the Illinois Supreme Court announced it would hear oral arguments on the State pension litigation on March 11, 2014, the plaintiffs in the Chicago cases asked for their suits to be stayed pending the Supreme Court’s decision.

Following the Illinois Supreme Court’s decision on May 8, 2015, which found the 2013 State pension reform legislation unconstitutional, the lower court proceeded with the Chicago pension fund lawsuits.

On July 24, 2015, Circuit Court Judge Rita Novak issued her opinion striking down the Chicago pension reform legislation as unconstitutional under the public pension protection clause of the Illinois Constitution.^[1] The City of Chicago immediately announced its intention to appeal the case to the Illinois Supreme Court.^[2] Lawyers for the City of Chicago have long argued that the “City’s pension reform legislation…does not diminish or impair pension benefits, but rather preserves and protects them.” In addition, following the Circuit Court decision, the City of Chicago filed a motion to stay pending appeal. On July 29, 2015, Circuit Court Judge Rita Novak denied the City’s motion to stay pending appeal, allowing the plaintiffs to recoup the benefits that would have been paid since the provisions of Public Act 98-0641 went into effect on January 1, 2015.

In early August, the Illinois Supreme Court agreed to expedite the City of Chicago’s appeal of the Circuit Court’s decision. Filings will be due on a quicker briefing schedule this fall with oral arguments in November. Lawyers for the City hope the process will lead to a final decision by the high court by the end of the year.

 

Background

The Municipal Employees’ Annuity and Benefit Fund of Chicago was created in 1921 by Illinois State statute to provide retirement and disability benefits for general employees of the City of Chicago and the Chicago Board of Education and their dependents.[3] It is governed by a five-member Board of Trustees. Two members are ex-officio (City Treasurer and City Comptroller) and three are elected by active employee members.

The Laborers’ Annuity and Benefit Fund of Chicago was created in 1935 by Illinois State statute to provide retirement and disability benefits for labor service employees of the City of Chicago and their dependents.[4] It is governed by an eight-member Board of Trustees. Two members are ex-officio (City Treasurer and City Comptroller), two are appointed by the City Department of Human Resources, one is appointed by the local labor union, two are elected by active employee members and one is elected by annuitant members.

Public Act 96-0889, enacted in April 2010, created a new tier of benefits for many public employees hired on or after January 1, 2011 including new members of the Chicago Municipal and Laborers’ pension funds.[5] This blog will refer to “Tier 1 employees” as those persons hired before the effective date of Public Act 96-0889 and “Tier 2 hires” as those persons hired on or after January 1, 2011.

Tier 1 employees in the Municipal and Laborers’ funds are eligible for full retirement benefits once they reach age 60 and have at least 10 years of employment at the City, age 55 with 25 years, or age 50 with 30 years of service. The amount of retirement annuity is 2.4% of final average salary multiplied by years of service. Final average salary is the highest average monthly salary for any 48 consecutive months within the last 10 years of service. The maximum annuity amount is 80% of final average salary. For example, a 63 year-old employee with 24 years of service and a $52,000 final average salary could retire with a $29,952 annuity: 24 x $52,000 x 2.4% = $29,952.[6] The annuity increases every year by an automatic compounded 3.0% adjustment until and unless the provisions of Public Act 98-0641, described below, go into effect. Employees with 20 years of service may retire as young as age 55 but their benefit is reduced by 0.25% for each month they are under age 60.

Pension benefit changes for Tier 2 employees as enacted by Public Act 96-0889 include higher retirement ages, a cap on the maximum pensionable salary and lower automatic annual benefit increases. Over time these benefit changes for new hires will slowly reduce liabilities from what they would have been as new employees are hired and fewer members remain in the old benefit tier. For a more complete discussion of the benefit changes made as part of Public Act 96-0889 you can read the Civic Federation’s most recent Status of Local Pension Funding report here.

 

Public Act 98-0641

On June 9, 2014, former Illinois Governor Pat Quinn signed Public Act 98-0641, making changes to pension benefit levels for current retirees and Tier 1 and Tier 2 employee members of two of the City of Chicago’s four pension funds, the Municipal and Laborers’ Funds. The reforms were agreed to by 28 of the 31 unions representing the two pension funds. Its provisions went into effect January 1, 2015, until Cook County Circuit Court struck down the law.

The Municipal Fund was projected to run out of money within 10 to 15 years and the Laborers’ Fund in 15 to 20 years if P.A. 98-0641 had not passed the General Assembly. The major provisions of the law include increases to the employer contribution and employee contribution and changes to the automatic annual increase for current retirees and Tier I employees. The plan was projected to increase the funded level of both funds to 90% by the end of 2055.

 

Employer Contributions

Before P.A. 98-0641 went into effect, employer contributions for the Municipal and Laborers’ funds were set at 1.25 and 1.0 times employee contributions two years prior, respectively. These multiples have not been sufficient for the actuarial needs of either fund since FY2003 for the Municipal Fund and since FY2004 for the Laborers’ Fund. The employer contribution shortfalls have contributed significantly to the fall in each fund’s funded ratio over the past 10 years.

Under the provisions of the new law, the multiples contributed by the City for each fund will increase gradually over five years starting in 2016 (tax year 2015) until in 2021 the city will begin to annually contribute an amount that will increase funding to 90% by the end of 2055. If the City fails to make the required contributions, the Illinois Comptroller will withhold State fund transfers to the City. This provision is similar to the intercept for the Police and Fire Funds that was enacted as part of Public Act 96-1495. The total City pension contribution in FY2015 (payable in FY2016) for the Municipal and Laborers’ Funds is budgeted at $557 million.[7]

The following chart summarizes the benefit changes and increases to employee contributions included in the pension reform package.

As the City of Chicago and the State of Illinois continue to grapple with growing unfunded pension liabilities the Civic Federation will continue to monitor and provide updates moving forward as the courts provide guidance on how to reform public pensions in the City of Chicago and State of Illinois.