By: Mark Glennon*
A Chicago trial judge, Rita Novak, today ruled that the pension reform law for two Chicago pensions is unconstitutional. Her full opinion is linked here.
That ruling was entirely predictable and is a correct application of the Illinois Supreme Court’s ruling earlier this year invalidating SB-1, a pension reform law for state pensions. Like it or not, the supreme court said you can’t cut pension benefits. The reform law for Chicago’s pensions would have cut benefits. It’s that simple. It won’t be reversed on appeal.
But Novak went much further, apparently rejecting an argument made by the city on an issue far more important in the longer term. For that part of her opinion, if I was still teaching in law school (which I used to do as an adjunct), I’d give her a ‘D.’
Specifically, the city argued that it’s not liable on the underlying obligation directly to pensioners if the pensions ever run dry. Surprisingly, as we wrote before, that’s an open issue. Yes, the city is liable to make the annual payments to pensions required by state law, but those payments can be whatever the legislature feels like setting.
That issue is critical in the long run because, if the city is right, one constitutional route to real pension reform would be simply to stop funding the pensions and begin funding some alternative at more affordable levels. No liability on the old pension would attach to the city.
Novak did not come right out and say explicitly that the city is directly on the hook to pensioners, but she apparently meant that with this convoluted language and reasoning:
Contrary to the city’s argument, it is not the Pension Code that creates the contractual relationship. Rather, if the state or municipal employer creates a pension system, the contractual relationship that is mandated derives from the Constitution and so does the `enforceable obligation’ to pay the benefits.
In other words, the state constitution somehow creates a contract not just with the pension but with the city, too. To heck with what the legislature wrote or intended when it created the pension.
That’s wrong. She should have analyzed the the particular statute that created the pension to see if it imposed liability. That’s not just my opinion. A few weeks ago I asked James Spiotto, a nationally recognized legal expert on municipal insolvency, about the issue. His response was immediate — you have to look the at the particular statute for the pension in question. (Illinois has 19 such statutes for its various pensions.) Novak, instead, based her reasoning only on some vague language in the SB-1 decision about the contractual relationship between employer and employer: “When the Supreme Court defined the rights guaranteed by the pension protection clause, it did so with reference to mandating `a contractual relationship between the employer and the employee’ and `creating an enforceable obligation to pay the benefits,’ ” Novak wrote.
That’s it. That’s the extent of her analysis of the issue. In fact, the issue wasn’t even before the Illinois Supreme Court in the SB-1 case, and it wasn’t about municipal pensions. The mess she made of the issue may be left dangling out there indefinitely. An appellate court could easily uphold invalidation of the reform law without addressing the issue, just based on the SB-1 decision. That’s what Novak should have done.
It’s not all bad news, arguably. First, the bill wouldn’t have solved much anyway. It would have reduced unfunded liabilities by less than $2 billion according to one earlier estimate
. They now exceed $10 billion.
Second, the invalidated law also would have substantially increased the required annual contributions by the city to the two pensions. Now, we will revert to the old funding schedule requiring some $250 million less from taxpayers over the next five years. Ironically, Mayor Emanuel had been asking for relief from that anyway. The can is kicked and unfunded liabilities will spike further.
Why might that be good news? With a super-majority in the Illinois General Assembly unwilling to really tackle the pension crisis, Illinois may be forced into a different strategy for Chicago: Just don’t fund the damn things.
Yes, kicking the can harder may be the only option for now — until control of the legislature changes. That’s effectively what we are doing now to a very large extent anyway. Eventually, the liability would become so preposterous that even the blind would have the most extreme image of insolvency burned into their optical cortexes. At least that would save taxpayers from pouring more into a bottomless hole. Rating agencies and the bond markets just might like it. They have so far. It’s higher annual contribution requirements that spooked them recently. They focus on near term liquidity more than long term solvency.
I’m not yet ready to say that would be best, but it’s starting to look like we’re being pushed there.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.