Late last week, in Jones et al v. Municipal Employees’ Annuity and Benefit Fund of Chicago et al (“Jones”), the Illinois Supreme Court struck down Public Act 98-641, which aimed to shore up two ailing Chicago pension funds. The decision is important for two reasons. First, citing precedent from its recent opinion overturning a prior attempt at Illinois pension reform in In re Pension Reform Litigation (“Heaton”), Jones reaffirms that the State of Illinois, the City of Chicago, and other public and municipal employers throughout the State of Illinois cannot address their pension funding problems by cutting benefits to current participants and active retirees in violation of the Illinois Supreme Court’s expansive reading of the pension protection clause under Article XIII, § 5 of the Illinois Constitution, even where the benefit cuts are part of a larger reform package aimed at bringing the pension funds back to solvency. Second, the decision appears to limit the ability of public employers to partner with union representatives to resolve pension funding problems when the negotiated reform package includes benefit cuts to current participants and active retirees.
History of Underfunding
With Public Act 98-641, the City sought to address a decades-in-the-making funding shortfall in both the Municipal Employees’, Officers’, and Officials' Annuity and Benefit Fund (MEABF) and the Laborers’ and Retirement Board Employees’ Annuity and Benefit Fund (LABF). Both funds are at risk of insolvency in the next 10 to 15 years. Public Act 98-641 required the City to gradually move to an actuarially-based funding model aimed at returning both funds to solvency by 2055.
In exchange for increased funding obligations, the City agreed with the various unions that represent the plans’ participants to increase annual participant contributions. Specifically, the City and representatives from 28 of its 31 unions agreed to gradually increase the amount that participants are required to contribute to each plan. The parties also agreed to reduce, for current participants and active retirees, the amount and frequency of certain post-retirement benefit increases. The negotiated reform package was subsequently approved by the Illinois legislature and became effective in 2014.
The Bargained-for Exchange
In Jones, the City sought to distinguish its legislative reform package from the Illinois state pension reform at issue in Heaton by arguing that Public Act 98-641 was the result of a painstaking negotiation between the City and elected representatives of its unions. The Supreme Court dismissed this argument, reasoning that the benefit cuts set forth in Public Act 98-641 were not reached through the normal collective bargaining process. Rather, the Supreme Court characterized the negotiating process that gave rise to Public Act 98-641 as akin to interest group advocacy in favor of legislation rather than a binding agreement that was the product of a formal collective bargaining process between the City and its unions. The court went on to reason that even if all participants had agreed to the benefit cuts under Public Act 98-641, those participants could not bargain away rights to pension benefits that were guaranteed under the pension protection clause.
Net Benefits to Participants and the Pension Protection Clause
The City also argued that despite the Supreme Court’s reading of the pension protection clause in Heaton, the Court should uphold Public Act 98-641 on the ground that the statute’s benefit reductions are justified in light of the City’s promise to bring the plans back to solvency. Public Act 98-641, the City argued, would provide a net benefit to all participants in the long run because provisions in the Illinois pension code ultimately limit benefits to the amounts available in the plan. The Court dismissed this argument, reasoning that a public body’s funding choices or decision to increase its own funding obligations are not benefits that are subject to protection under the pension protection clause. The court further stated that any statutory provision that limits benefits to the amounts available in the plans themselves would be unconstitutional in light of the pension protection clause – which only protects a participant’s rights to receive benefits in full and not the public body’s funding choices.
Importantly, the Jones decision will not be the last Illinois Supreme Court decision to address pension reform efforts. In the short term, there are other pension reform efforts that are being developed and ongoing litigation involving efforts to reform certain other public pension plans. Decisions in those cases are expected to provide further guidance on the extent to which participant benefits can be altered. In particular, future court decisions will likely further address the extent to which benefit cuts can be agreed to in the collective bargaining process (and the extent to which a union can serve as a designated agent for active vs. retired plan participants). In any event, the Supreme Court’s decision in Jones places significant additional restrictions on the ability of Illinois public employers to craft meaningful pension reform.