Following the lead of the Illinois Supreme Court in In re Pension Reform Litigation, 2015 IL 118585 [see Illinois and New Jersey Pension Decisions: Implications for Bondholders], Judge Rita Novak of the Circuit Court of Cook County has ruled that an Illinois law modifying provisions of Chicago’s pension statute violated the Illinois Constitution.

The Illinois Constitution protects public pensions in the State from diminishment.  In this case, both Chicago and the State argued that the newly-enacted pension law provided important new protections for pensioners and, therefore, was a net benefit to pensioners rather than a diminishment.  Chicago argued, for example, that the new law made pension payments enforceable against the City for the first time – an important benefit to pensioners.  The Court ruled, however, that the Constitution already embodied a right to enforce payment against the City and that this new benefit was, therefore, illusory.  More fundamentally, the Court rejected the “net benefit” argument altogether, holding that constitutional protections cannot be replaced with statutory rights that may subsequently be repudiated.  Diminishment of pensions cannot be legislated, even to achieve fiscal stability, because the constitutional protection against impairment is paramount.

Chicago further argued that the law was the result of extensive negotiation and a “bargained for exchange” with the City’s unions.  The Court held that, as a matter of law, there is no legal basis for a "bargained for exchange" override of a constitutional provision.  The Court also concluded that the unions that supported the law did not have the power to bind their members to any agreement, and did not have the legal right to bind retirees in any event.  Finally, the Court held that even if the unions had effectively bargained away the rights of their members and retirees, their agreement would be insufficient because the pension protections in the Illinois Constitution run to individuals, and as a consequence, each worker and retiree has individual standing to challenge the unconstitutionality of a law diminishing his or her pension rights.

While this decision will be appealed to the Illinois Supreme Court, it is a well-reasoned opinion, and in view of the recent decision of the Supreme Court striking down a law seeking to reform State pensions, we expect the Supreme Court will affirm Judge Novak's decision striking down the law.

The consequences of this decision, if upheld, will be very significant for Chicago, other municipalities in Illinois, and Illinois itself.  If upheld, it will be virtually impossible to impair pension benefits in any way other than in a Chapter 9 bankruptcy proceeding, and currently, Illinois municipalities are not authorized to file under Chapter 9.  Moreover, Chapter 9 is not applicable to states in any event, so even if Illinois changed its laws to permit its municipalities to file for bankruptcy, this would not help the State deal with the seriously-underfunded State pension plans.  This fundamental fiscal limitation is sure to place greater pressure on the necessity for raising taxes and on other major expenditures, such as debt service on bonds.  Another recession will almost certainly cause substantial turmoil and meaningful disruption for Illinois and its municipalities.