Municipal Finance

Court Review of Public Pension Reform: The Latest Ruling Emphasizes Consensual Agreement Over Legislatively Mandated Changes


Court Review of Public Pension Reform:  The Latest Ruling Emphasizes Consensual Agreement Over Legislatively Mandated Changes ( ( Depositphoto_ Justice – © JanPietruszka) )

by James E. Spiotto*

Over the last eight years, over 45 states and numerous local governments have instituted some form of pension reform which many times included increasing contributions and reducing benefits.  Over the last four years, there have been over 18 state court decisions dealing with pension reforms by state or local governments.  Over 75% of those affirmed the pension reform including reduction of benefits or increase of contributions, as necessary, many times citing the higher public purpose of assuring the funds for essential governmental services and needed infrastructure.  Illinois is one of the few states that has, over the past two years, ruled against legislatively mandated pension reform, including any reduction of benefits or any involuntary increases of contributions by public workers.  The City of Chicago, over a number of years, attempted to develop and negotiate with union representatives a reform which they believe provided a net benefit to the laborers and municipal workers by significantly changing the method of funding by the City and providing rights to ensure payments were made along with the gradual increase in contributions from the public workers.  While these pension reforms were the product of negotiations between the City and union representatives, with 27 out of 31 union leaders in agreement, the reforms were not the result of a formal collective bargaining process with full procedural compliance.  Nonetheless, the efforts and intentions of the City and union leaders are praiseworthy and clearly aimed at the greater public good.

The Illinois Supreme Court, hearing an appeal from the Circuit Court, found in its decision of March 24, 2016 that the City’s argument that there was a net benefit to the workers and the settlement was collectively bargained for were unpersuasive and lacked individual consent from public workers and retirees and therefore is contrary to the pension clause of the Illinois Constitution that pensions are “an enforceable contractual relationship the benefits of which shall not be diminished or impaired”.  Many may be disappointed in the ruling given the significant effort the City and union representatives exerted to reach a resolution and the fact that there appeared to be union representatives and public workers supportive of the increased funding levels and rights that would be available from the negotiated resolution, which was incorporated into a state statute.  However, all of the interested parties should consider, given this decision, what is in the best interest of the City, the public workers, the citizens and taxpayers.

“It should be remembered that full funding of pension liability goes hand in hand with the economic success of the community and…motivates taxpayers to desire to reside there…”

Past efforts to reach a consensual resolution should be noted as a good faith effort, and future efforts by the City and union representatives for the public workers should be encouraged.  It is clear and long recognized that the past and current funding ratio provided by state law is insufficient but, according to the Illinois Supreme Court decision, the amount and timing of funding is solely up to the City and State legislature.  In order to prevent even more drastic results and to avoid any situation where funds are insufficient to pay retiree benefits or where funding current pension benefits crowds out appropriate funding of essential services and needed infrastructure, the court decision should be read as an encouragement to all parties to come together, to find a solution and reach agreement through a mechanism that is binding on public workers and retirees so that the City can continue to thrive as one of the major world class cities.

There is still the dynamic uncertainty for a reasonable resolution of when and how much will be funded.  Public workers desire full funding of pensions as soon as possible from a dedicated and sufficient source to assure there will be sufficient funds in the pension fund so that all benefits can be timely made.  Present legislation does not provide that assurance.  The rejected pension reform was intended to provide that assurance with negotiated adjustments such as modification of the COLA and significant increased funding by the City and a gradual increase in contributions by public workers over time.  The City pointed out adjustments were necessary to assure full funding of all desired services and infrastructure consistent with prudent financial planning while attempting to pay all pension benefits that reasonably could be paid.  Many union leaders and workers agreed, and the Illinois legislature passed legislation embodying the reform.  The Illinois Supreme Court struck down the legislation and reform because each worker and retiree did not individually consent and collective bargaining procedures were not followed thereby violating public workers’ and retirees’ respective rights under the pension clause of the Illinois Constitution.  (Ill. Const. 1970 Art. XIII, § 5).  The impact of the Illinois Supreme Court ruling is to encourage collective bargaining where the individual members of the pension funds (public workers along with retirees) may, as they deem appropriate, individually agree to adjustments that short term and long term assure the payment of all that can be paid while assuring the City and its taxpayers that all needed services and infrastructure will be funded at an acceptable level.

The experience of Detroit in the last three decades and Bridgeport, Connecticut in 1987-1991 demonstrate raising taxes to meet budget deficits and not funding in full needed services in order to “balance the budget” miss the mark.  The approach does not increase revenues or balance the budget.  It actually reduces revenues as corporate and individual taxpayers exit.  Further, those corporations and individuals interested in moving into the city take a pass because of the eroding circumstances.  These lessons have motivated others and should motivate all interested parties to renew their good faith efforts and find an agreeable resolution through the collective bargaining process or its equivalent (such as class representatives or class actions) that can involve and bind each member or retiree to a constructive resolution that is sustainable and affordable and provides as much funding as reasonable and affordable as soon as possible.

It should be remembered that full funding of pension liability goes hand in hand with the economic success of the community and provision for education, public safety, transportation and other public services at the desired level that motivates taxpayers to desire to reside there and encourages other businesses and individuals to be anxious to move there.  Part of any plan for fully funding of pension obligations is dedicated economic development that brings new jobs and accompanying new tax revenues and full funding of needed public services.  Without that, merely increasing taxes and reducing services to pay pensions has historically produced less for all as well as reduced employment, both public and private.  This reality should motivate all parties to reach the right solution that is sustainable and affordable without need of involuntarily imposing reform by unilateral legislation, annihilating litigation or other action that leads to public dissatisfaction.

Consensual resolution and compromise is the best means of assuring the increased funding of pensions and the assured payment of pension benefits as well as the continued growth and success of the City. Without resolution now, the cloud of uncertainty could mean far less benefits being paid and far fewer workers being retained, to the detriment of all the parties, the City, public workers, citizens and taxpayers.

 

*Mr. Spiotto is Co-Publisher of MuniNet Guide.  He also is Managing Director of Chapman Strategic Advisors LLC and a retired partner of Chapman and Cutler LLP.  However, the views set forth above are solely those of the author and do not reflect the positions, opinions or views of Chapman and Cutler LLP or Chapman Strategic Advisors LLC. 

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