– In Key Decision, Junk-Rated Chicago’s Pension Reform Bid Ruled Unconstitutional (ZeroHedge, July 25, 2015):
On Thursday, we previewed a critical court ruling involving Chicago mayor Rahm Emanuel’s effort to cut pension expenses and plug a yawning budget gap. Here’s a brief recap of the story so far:
Back in May, the Illinois Supreme Court set a de facto precedent for lawmakers across the country when a bid to cut pension benefits was struck down in a unanimous ruling. Anyone who might have been confused as to the significance of the decision got a wake up call from Moody’s when the ratings agency, citing the read-through for Chicago’s fiscal situation, downgraded the city to junk. This is part of a larger fiscal crisis in the country which has left almost half of US states facing funding gaps for the upcoming fiscal year. All told, the total pension shortfall across states and cities is anywhere between $1.5 trillion and $2.4 trillion depending on who you ask.
And here’s a recap of what was at stake in Friday’s ruling, courtesy of the Illinois Policy Institute:
A Cook County judge will rule on the legality of a 2014 pension law aimed at reforming two of Chicago’s underfunded city retirement systems. While the pension law included some much-needed reforms, such as an increase in the retirement age, if upheld the law ultimately would put Chicago residents on the hook for millions of dollars of tax increases.
Well, those residents can relax for now, because as expected, Emanuel’s plan was determined to be unconstitutional by Rita M. Novak of the Cook County Circuit Court. The New York Times has more:
A judge in Chicago ruled on Friday that a plan to change city workers’ pensions was unconstitutional. The case is being closely watched for its effect on the city’s uncertain finances.
“This principle is particularly compelling where the Supreme Court’s decision is so recent, deals with such closely parallel issues and provides crystal-clear direction on the proper interpretation of the law,” Judge Novak wrote. The Constitution of Illinois provides that public pensions “shall not be diminished or impaired.”
Pension costs in many American states and cities are growing much faster than the money available to pay them, causing a painful squeeze. Officials who try to restore balance by reducing pensions in some way are almost always sued; outcomes of these lawsuits vary widely from state to state.
Some of the worst problems have been brewing for years in Illinois, particularly in Chicago, where the city’s pension contributions have long been set artificially low by lawmakers in Springfield, the state capital. With more and more city workers now retiring, a $20 billion deficit has materialized, and Friday’s ruling is seen as a setback to Mayor Rahm Emanuel’s efforts to close this gap and rescue Chicago’s credit rating.
Officials in the mayor’s office said the city would appeal.
“While we are disappointed by the trial court’s ruling, we have always recognized that this matter will ultimately be resolved by the Illinois Supreme Court,” said Chicago’s legal counsel, Stephen Patton, in a statement. “We now look forward to having our arguments heard there.”
While we certainly understand the idea that cutting pension benefits amounts a breach of the so-called “implicit contract” between public sector employees and state and local governments, it seems as though the logic employed both by the workers and by the courts suffers from the same myopia and denial of economic realities that has helped saddle the world with a combined $19 trillion in debt. Put simply: if the pension system isn’t reformed, it will run out of money and no one will get anything. Here’s The Times again:
“All city residents can be reassured that the Constitution — our state’s highest law — means what it says and will be respected, while city employees and retirees can be assured that their modest retirement income is protected,” said Ms. Lynch, the executive director of Afscme’s Council 31 in Chicago.
Chicago said its pension overhaul would provide “massive net benefits” to workers if allowed to proceed. That was because the two pension funds at issue — one for laborers and one for general city workers — were heading toward certain insolvency. An insolvent system would be able to pay retirees only about 30 percent of their benefits.
So for now, delay-and-pray wins and in all likelihood, Chicago will lose on appeal, meaning the city will sink further into insolvency while those that will be most affected when the pension ponzi finally collapses continue to object to the very reform measures that might save them.
Full decision below.