Illinois Supreme Court Holds Chicago Pension Law Unconstitutional
On March 24, 2016 the Supreme Court of the State of Illinois affirmed the Circuit Court’s decision that the Illinois law modifying the provisions of Chicago’s pension statute violated the Illinois Constitution.
The Supreme Court rejected the two core arguments presented by Chicago. Chicago’s first argument was that the new law provided a “net benefit” for the pension funds and therefore did not constitute an impairment.
The Supreme Court critiqued this view as being fundamentally flawed. The so-called “benefits” of the new law were illusionary. Most importantly Chicago asserted that the law provided a new effective enforcement mechanism to ensure pension contributions were made. The Supreme Court explained that strong enforcement mechanisms already existed under Illinois law.
Chicago’s second argument was that the law was the product of a bargained-for-exchange. Unions had input into the law and the representatives of 28 of 31 unions voted at a meeting to support the law.
The Supreme Court held that a bargained-for-exchange may only occur in the context of an authorized collective bargaining process. It was undisputed that the unions in this instance “were not acting as authorized agents within a collective bargaining process.”
The Supreme Court holding was not surprising in light of prior decisions. However, the opinion did clarify that pension benefits may be modified in a bargained-for-exchange for consideration reached through the collective bargaining process. This clarification differs from the Circuit Court opinion that stated that pension protections in the Illinois Constitution run to individuals so that each individual beneficiary would have to agree to any diminishment of pension benefits.
The Illinois Supreme Court decision does not explicitly address, however, whether unions in the collective bargaining process have the power to bind retirees. The United States Supreme Court has held that retirees are not “employees” within the meaning of the National Labor Relations Act. Therefore, unions do not have the power to bargain on behalf of retirees.
Aside from raising revenue and cutting operating expenses, Chicago has limited options to address its pension crisis. Chicago could focus on developing a collective bargaining package which will win over the unions yet also help it address its unfunded liabilities in a meaningful way. This is a daunting challenge but it seems like the only path forward barring a constitutional amendment or a State law permitting Chicago to file under chapter 9.
David Dubrow is a municipal finance partner at Arent Fox LLP in New York and focuses on municipal bond defaults, work-outs, and bankruptcies.