Cook County Circuit Judge Rita Novak’s decision last month to throw out the law reforming two city of Chicago pension plans does not answer a central question: How will retired city workers get paid when the pension funds run out of money?
I say “when,” not “if.” Novak acknowledged the undisputed fact that under the law, without the reforms she threw out, the two pension funds will run out of money in 10 and 14 years, respectively.
She said that doesn’t matter because the Illinois Constitution prohibits any impairment or diminishing of pension benefits. She interpreted a recent Illinois Supreme Court decision invalidating a state pension reform law to mean that funding issues are separate and irrelevant. Retirees must get their benefits at unchanged levels and funding is up to somebody else to figure out.
That is a plausible reading of some of the language in the Supreme Court’s decision. But that made sense in the context of state employee pensions that are an obligation of the state. The state — a sovereign body with unlimited taxing powers — can ultimately figure out how to fund the pensions to which it has obligated itself.
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City pensions are fundamentally different. The city is not legally obligated to pay pensions beyond its statutory obligation to make contributions to the pension funds — an obligation Chicago has always fulfilled. This is not ambiguous, not a lawyer’s argument about what is implicit. The law governing city pensions says, in so many words, that there is no city obligation to the beneficiaries beyond the amount that the city is obligated to contribute to the funds.
Moreover, cities, unlike states, operate within limits on their funding capacity that are constitutional and geographical. For example, Chicago is constitutionally barred from imposing an income tax without state authorization. Raising the real estate tax beyond a certain level is constrained by the capacity of individuals and businesses to escape it by moving to surrounding jurisdictions that will welcome them. Ultimately, if authorized by the state, cities can even go bankrupt. States can’t.
The unions knew that the old law did not provide enough city funding to cover the pension benefits. That’s why 27 of the 30 unions with employees in the pension funds signed off on a reform that included some reduction in future benefit increases (which now far exceed inflation), combined with a massive increase in city funding. The combination makes the funds financially sound going forward. The unions supported the law that Novak tossed — and pension trustees are now supporting it in court — because their members are better off, not “diminished or impaired,” by its provisions.
Chicago’s pension law now goes up to the Illinois Supreme Court on appeal. Before any Supreme Court justice decides that Novak might be right in throwing out the law, he or she needs to answer the question Novak avoids: If a law that increases funding to pay pensions is unconstitutional, then where will the money come from to pay the pensions when the current funding runs out?
The plaintiffs’ lawyers before Judge Novak suggested that at some point in the future when the shortfall is imminent, lawyers like themselves could bring legal action — against someone. They did not offer to provide ongoing contributions to assure that adequate funding would be available, or explain how one would know that the defendants in the lawsuit (whoever they might be) could provide the massive dollars that would suddenly be needed after payments at unchanged benefit levels had depleted the existing funds.
A constitutional pension provision designed to protect public employees should not be construed to subject their retirement security to speculation about unpredictable legal proceedings and future financial realities.
Chicago’s pension reform law is an honest effort, negotiated by the city and its unions, to protect city employees, not impair them. A prior Supreme Court decision to throw out a very different state statute should not create a constitutional straitjacket for the city of Chicago and its employees.
John Schmidt, a Chicago lawyer, served as the associate attorney general of the United States from 1994 to 1997.