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*By: Mark Glennon*

 

The significance is enormous but rarely discussed. It runs contrary to a widely accepted assumption in the municipal bond and pension communities that Chicago is liable to pensioners if the pensions run dry. We now have a very firm opinion from a respected lawyer. I’ve looked at the law and the briefs further and I think he’s right. Here’s what John Schmidt wrote in an opinion piece yesterday in the Chicago Tribune:

The city is not legally obligated to pay pensions beyond its statutory obligation to make contributions to the pension funds — an obligation Chicago has always fulfilled. This is not ambiguous, not a lawyer’s argument about what is implicit. The law governing city pensions says, in so many words, that there is no city obligation to the beneficiaries beyond the amount that the city is obligated to contribute to the funds.

Schmidt is a partner at Mayer, Brown, served as an Associate U.S. Attorney General, Harvard Law grad, etc.

 

It sure looks like he’s right. The state could not have been more clear about it in the Illinois Pension Code that established Chicago’s pensions. Here is the statute Schmidt is referring to:

Any pension payable under [the Pension Code] shall not be construed to be a legal obligation or debt of the State, or of any county, city, town, municipal corporation or body politic and corporate located in the State, other than the pension fund concerned, but shall be held to be solely an obligation of such pension fund, unless otherwise specifically provided in the law creating such fund. 40 ILCS 5/22-403.

Unions have a different view. They’ve argued that the constitutional pension protection clause, which was enacted after that statute, overrides the statute. You can find that and their other reasoning in their earlier brief, starting on page 15. The city’s contrary argument regarding two of its pensions (MEABF and LABF) is on page 6 of their earlier pleading in the court challenge to the reform law to those two pensions. In the trial court decision last month invalidating that reform law, the judge seemed to agree with the unions, though the opinion is garbled on that point.

 

The city undoubtedly will be challenging that vigorously in its appeal. It’s possible, however, that the Illinois Supreme Court will sidestep the issue. Even if it doesn’t, you can’t trust the Illinois Supreme Court to apply the law, anyway.

 

Personally, I did think the Illinois Supreme Court reached the right decision earlier this year when it invalidated SB-1, the reform law for the state pensions. The constitutional pension protection clause means what it says, I think. But I also think that the statute quoted above means what it says. I don’t find the arguments against it convincing. The pension protection clause has nothing to do with who is liable for them. When the legislature wanted a particular unit of government liable for the pensions it had to do that expressly, which it did with the state pensions.

 

The consequences are enormous because this opens a clear path to real pension reform. Yes, Chicago is obligated to pay annual amounts to the pensions set by state law. But state law could be changed to allow the city simply to stop funding the existing pensions and begin funding a new replacement in amounts that are reasonable and affordable. The replacement could be a traditional defined benefit plan, 401(k)-style, a hybrid or whatever is decided. If the city is not liable, a bankruptcy proceeding covering just a pension would also be more viable. The city, however, is using the argument as part of its reasoning that the reform bill before the court  is valid. To heck with it and other reform bills that have gotten through the legislature. They wouldn’t accomplish much and would still leave us with a rotten system.

 

We’ll have to wait to see if we get the right result on this issue.

 

Update: For a good summary of Chicago’s pension problems, read this brief filed earlier this year.

 

*Mark Glennon is founder of WirePoints. Opinions expressed are his own.

 

 

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