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July 24, 2015 01:00 AM

Judge rules Chicago pension fix is unconstitutional

Rob Kozlowski
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    Bloomberg
    Chicago Mayor Rahm Emanuel

    Updated with correction

    A Cook County circuit court judge ruled unconstitutional a pension reform law that took effect on Jan. 1 aimed at improving the funding of Chicago's pension funds for laborers and municipal workers.

    Judge Rita A. Novak declared the reform unconstitutional Friday morning. The law, signed by then-Gov. Pat Quinn in June 2014, raised employee and employer contributions and reduced retiree cost-of-living adjustments for the $5.1 billion Chicago Municipal Employees' Annuity & Benefit Fund and $1.4 billion Chicago Laborers' Annuity & Benefit Fund.

    In a statement on its website, the municipal fund said: “It is our expectation that a motion to stay the decision until such time that the Illinois Supreme Court can rule on the case will be filed. Once any such motion to stay is ruled upon by Judge Novak and/or the Illinois Supreme Court, MEABF will update our members.”

    Standard & Poor's Ratings Services said in a news release, “We will likely lower our (general obligation) rating within the next six months if the city fails to incorporate pension contributions in a structurally balanced manner.”

    In May, S&P lowered the rating of Chicago's general obligation credit to A- from A+, referencing an earlier decision by the Illinois Supreme Court declaring a state pension reform law unconstitutional.

    In a statement published on Chicago Mayor Rahm Emanuel's website, the city's counsel Stephen Patton said, “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. We now look forward to having our arguments heard there. We continue to strongly believe that the city's pension reform legislation, unlike the state legislation held unconstitutional this past spring, does not diminish or impair pension benefits, but rather preserves and protects them.”

    The municipal workers' pension fund has just 42.1% of the assets it needs, with an unfunded liability of $7.13 billion, according to a July 20 financial report distributed to potential buyers of the city's most recent bond offering. The laborers' fund has 65.9% of the assets it needs, with an unfunded liability of $719 million.

    The municipal workers' fund is projected to run out of money in 2026, with the laborers' becoming insolvent three years later.

    As a result of Friday's ruling, the city won't have to pay an additional $94.9 million next year to the two funds. Under the law that has been struck down, the city's combined contribution would have increased 55%, to $266.7 million in 2016, from $171.8 million that would have been due under the old law.

    Mayor Rahm Emanuel has given no indication what action he might take in response to the court ruling.

    James Mohler, MEABF executive director, and Michael Walsh, Chicago Laborers' executive director and chief investment officer, did not immediately return phone calls seeking further comment.

    Greg Hinz of Crain's Chicago Business, P&I's sister publication, contributed to this story.

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