NASA defines a black hole as a place in space where gravity is relentless and pulls so much that not even light can get out.  And, so it goes with Chicago as it attempts to get out of its pension black hole. The recent Illinois Supreme Court opinion in Jones v. Municipal Employees’ Annuity and Benefit Fund of Chicago, 2016 IL 119618 (Ill. 2016) (“Jones”) may have created a wormhole or way through Chicago’s pension black hole.  That way through is collective bargaining, as discussed below.

Pensions are like black holes because while we can size the problems, we can’t see solutions – at least yet.  Market volatility impacts returns on investments and the parties involved have not found a level playing field to talk about what happens if adjustments are not made.  There are a myriad of answers but it is going to take persistence and patience and using cases like Jones as a paradigm to find solutions.  Pensions are not intractable, but they are complex, and like black holes there is a lot more information to be gathered in terms of finding solutions.[1]

Background

In Jones, the Illinois Supreme Court reviewed and affirmed the lower court’s determination that Chicago’s Public Act 98-641 (the “Act”), which amended the Illinois Pension Code, was unconstitutional in its entirety because it diminished pension benefits in violation of the pension protection clause.  Chicago argued that the Act preserved the pension funds rather than damaging them by providing net benefits (“net benefits”) and that union acquiescence through negotiation at the time rendered the changes legal (“bargained-for exchange”).  The Jones Court rejected both arguments.

Overview of Ruling

Looking at the “net benefit” argument, the Court was quick to cite to its earlier ruling In re Pension Reform Litigation2015 IL 118585 (Ill. 2015) (“Heaton”).  InHeaton, the Court construed the pension protection clause set forth in article XIII, section 5, of the Illinois Constitution of 1970 (Ill. Const. 1970, Art. XIII, Section 5) which provides:

Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.

As it did in Heaton, the Court held in Jones that the pension protection clause prohibits any unilateral reduction or elimination of pension benefits conferred by membership in the pension system.  The Court affirmed its prior interpretation of the Illinois pension protection clause, holding that the clause protects benefits and not actual funding thresholds.

Net Benefit

As anticipated, the Jones Court wholly rejected the City’s argument that the changes to the Act provided an offsetting benefit to members because it rescued the pension fund from insolvency and guaranteed that pensions would be paid by imposing an enhanced statutory funding obligation on the City.

The Court’s increased gravity on the City’s financial stability net benefit argument is relentless in terms of the City’s ability to address its funding problems.  The Court was succinct:

To put it simply, in 10 years, the members of the Funds will be no less entitled to the benefits they were promised.  Thus, the “guaranty” that the benefits due will be paid is merely an offer to do something already constitutionally mandated by the pension protection clause.  Since participants already enjoy that legal protection, we reject the notion that the promise of solvency can be “netted” against the unconstitutional diminishment of benefits. Jones, at 13-14.

Bargained-For Exchange

The City’s second argument was that the Act was not a product of unilateral action as it codified a bargained-for exchange made between the City and the unions representing the various fund participants.  According to the City’s papers and affidavit in support, a working group drawn from the member unions actively participated in the negotiations with the City that culminated in the Act.  The City asserted that before the proposed legislation was presented, elected representatives from the 31 unions met and determined that the unions could support the terms of the proposed legislation.  As a result of the meeting, 28 of the 31 unions represented at the meeting voted in favor of the proposed legislation.  Following the vote, union representatives met with legislators to confirm their support for the proposed legislation.

The Court was unpersuaded by the City’s bargained-for-exchange argument, focusing on the fact that the unions were not “acting as authorized agents within a collective bargaining process.”  As a result, the Court found that the individual fund members “have done nothing that could be said to have unequivocally assented to the new terms or to have ‘bargained away’ their constitutional rights.”  Id. at 17.  As a result, the Court held there could be no waiver.

Using the “Jones” Wormhole to Escape

In analyzing the “bargained-for exchange” argument, the Supreme Court focused on the importance of the collective bargaining process.  As part of this process, employees always designate a particular union as their exclusive agent for collective bargaining negotiations.  When the exclusive agent is used, rights, including constitutional rights, can be bargained away or waived.

The Court cited Ballentine v. Koch, 674 N.E.2d 292 (N.Y .Ct. App. 1996):

“[B]ecause plaintiffs designated the PBA as their agent for the collective bargaining negotiations at issue here and were thus bound by its actions taken on their behalf during the negotiation process, [citation] the PBA’s waiver of the constitutional protections of [New York’s pension protection clause] is valid as to plaintiffs***.” Id. at 296.

The Court also cited Schacht v. City of New York, 346 N.E.2d 518 (N.Y. Ct. App. 1976):

“Plaintiff, having designated the union to be her agent for collective bargaining purposes, is bound by agreements made by that union on her behalf.” Id. at 519

The Jones Court created a wormhole in Chicago’s pension black hole.  The Court’s decision makes clear that it is possible to negotiate enforceable waivers and changes through the collective bargaining process.  This is what Chicago tried to do.  But Chicago failed because it did not use the formal collective bargaining process with the properly appointed designated agent for the unions that are to be impacted or receive the “bargained for exchange”.

Collective Bargaining and Bargained-For Exchange

Pension black holes seem to be everywhere.  They are painful for cities, employees, retirees and taxpayers and the Jones decision validates the use of collective bargaining to find consensual solutions to pension underfunding.  Litigation is accomplishing little in terms of problem solving or making anything better for the cities or their employees and retirees.

Exploring the Wormhole is Time Critical

Pensions are at the root of the reduction of essential services which can make a city uninhabitable.  On March 11, 2016, National Public Radio reported that murders in Chicago were up 108% over this time last year.  The number of shooting incidents is also up by 120% compared to the first nine weeks of 2015.  Chicago police are under increased scrutiny for misconduct.  Morale has been described as “poor” and the Mayor’s relationship with the police is less than optimal.

When a city’s budget is pushed past the breaking point, like Chicago’s is, options are limited, people are frustrated and trust is at an all-time low.  This is not an ideal environment in which to conduct collective bargaining asking for a “bargained for exchange” that would provide financial stability but reduce pensions.  Nor is it an ideal time to ask the taxpayers to take on additional taxes.

If the answer is collective bargaining, the question is how can the collective bargaining process result in compromises that are acceptable to a city and its employees and retirees?  Setting aside the fact that pension liabilities have been estimated to the point that the sky is or could fall, it is now time for Chicago and its unions to take a step back and figure out how to create an environment that is favorable to negotiation and ensures adequate and accurate information is exchanged.  Nothing is going to get better until there is a focus on rebuilding trust.  There is an old acorn that says when negotiation is unsuccessful, change the people at the table.  In this case, adding neutral professionals with expertise could change the dynamic and the results of the process.

Mediation

In prior blogs (Back To The Future: This Plummeting Oil & Gas Market Is Unlike Any Prior CrisisStockton’s Confirmed Plan: “The Best Bad Idea”) we have written a lot about the mediation process.  We have talked about how it has been used in any number of municipal situations — Detroit, Stockton, San Bernardino to name a few.  Now is the time to add qualified mediators, in addition to, but separate from, those typically involved in the collective bargaining process.  The parties need neutrals that can help design a better process and can bring the additional skill sets necessary to work through the complexities of unfunded pensions and post-employment benefits and municipal restructuring.  This includes pension actuaries, accountants who can confirm pension liabilities and well trained mediators who are familiar with municipal finance and restructuring.  The right team, with the right experience, can supplement the collective bargaining process leading to a true bargained for exchange.

Why more or different mediators?  The collective bargaining process and the parties who participate are deeply experienced in negotiating their labor contracts.  The underfunding of pensions and other post-employment benefits is a different landscape and requires additional neutrals who are qualified to help the parties identify multiple solutions.  Using distributive bargaining is simply not workable.

A case in point is the City of the Vallejo.  Prior to Vallejo’s chapter 9 bankruptcy filing, Vallejo and four of its unions entered into collective bargaining over their contracts with a labor mediator.  They were unable to reach a resolution.  After Vallejo filed, the unions objected to the rejection of their contracts.  Three of the unions settled during bankruptcy.  The fourth continued to object and that led to the Ninth Circuit Court of Appeals holding that union contracts can be rejected in chapter 9 cases.  One has to wonder what might have been different if a mediator with municipal bankruptcy expertise had been involved in the pre-filing collective bargaining mediation.  The fact that three unions ultimately negotiated a post-petition resolution suggests that having a mediator with municipal bankruptcy experience at the table pre-petition might have led to a different and better result for everyone.

Chicago Has the Right Idea

Chicago has the right idea about negotiating, it just failed to follow collective bargaining rules.  The good news is that the Illinois Supreme Court highlighted what needs to happen for constitutional pension protections to be changed, modified or waived through collective bargaining.

The gravity in black holes is so strong because matter has been squeezed into a tiny space.  This can happen when a star is dying.  Unfunded pensions have pushed a lot of critically important financial, labor and policy matters into a very tiny space.  Essential services, like police, fire and schools among others, stand to suffer further reductions if Chicago is unable to find answers for its dire pension underfunding.  If Chicago continues to try to live in its pension black hole, its star could die.  The good news is there is an unexplored wormhole that Chicago could and should choose to venture through.