City lawyers predict ‘catastrophic outcome’ if pension reform overturned

Chicago faces a $300 million deficit in 2016 with shortfalls continuing “for the forseeable future” — even before piling on $20 billion in pension liabilities that have saddled the city with the “worst credit rating of any major city other than Detroit.”

And if state legislation that saved two of four city employee pension funds is overturned, a “catastrophic outcome” awaits retirees and Chicago taxpayers alike triggered by “further downgrades.”

Nobody’s talking about it in the race for mayor, thanks to Rahm Emanuel’s decision to postpone the day of reckoning until after the election. But that’s the dire portrait of city finances painted in the city’s friend-of-the court brief in the state pension case.

After putting the state case on a fast-track, the Illinois Supreme Court ruled this week that it won’t have time to hear any friend-of-the court briefs.

But the city’s filing nevertheless paints the bleakest and most accurate picture yet of the financial crisis that awaits the winner of the Feb. 24 mayoral election.

“The Chicago bill should survive, regardless of the outcome of this appeal. If it doesn’t, the city’s liabilities will increase by $2.5 million a day,” Corporation Counsel Stephen Patton wrote in the Jan. 12 filing.

“The city will suffer further [bond rating] downgrades that could materially increase the cost of borrowing money essential to funding basic operations. And it could make the city immediately liable to pay hundreds of millions of dollars as a result of default and early termination of debt-related obligations.”

In overturning the state bill, a Sangamon County judge ruled that the state made a “constitutionally-protected promise” to its employees that cannot be broken. Pension benefits cannot be “diminished or impaired.”

Patton countered that “no Illinois or federal court has ever held” that there are “super contracts uniquely exempt from” the state’s police powers.

“Under the Circuit Court’s approach, pension benefits must be paid, no matter how catastrophic the result for current or future retirees, employees who would be terminated for lack of funds to pay them or municipal residents who would not receive adequate levels of basic services because all revenues are funneled into pensions. This turns the pension clause into a suicide pact,” the city’s brief contends.

Emanuel has consistently rejected comparisons to Detroit, a city that recently emerged from bankruptcy. But Patton used Detroit to make his argument in favor of police powers.

“Pension plans for the city of Detroit sought to avoid the bankruptcy court’s power to modify pension obligations by asserting that, under the Michigan Constitution, pension debt has greater protection than ordinary contract debt. The court rejected that argument,” he wrote.

The corporation counsel further noted that the bill that saved the Municipal Employees and Laborers pension funds was negotiated with the
consent of 30 of 33 unions and required the city to contribute $2 for every $1 more that retirees contribute.

And he argued that “extraordinary circumstances justify the state’s exercise of its police powers” to avoid a “catastrophic outcome for the city and retirees alike.”

“Neither the city nor other municipalities has any feasible alternative to the police powers exception. If there is a `Plan B,’ we have not been able to find it,” Patton wrote.

The Chicago pension reform bill raised employee contributions by 29 percent — from 8.5 percent currently to 11 percent by 2019 — and ended compounded cost-of-living adjustments for retirees ineligible for Social Security that have been a driving force behind the city’s pension crisis.

Emanuel initially proposed raising property taxes by $250 million over five years to bankroll the city’s increased contribution to save the two funds.

He agreed to substitute a 56 percent increase in Chicago’s telephone tax for the city’s first-year contribution, only after then-Gov. Pat Quinn balked at a pre-election property tax hike.

The mayor has refused to say how he plans to meet the city’s increased obligations to the two funds after the first year, when the telephone tax will fall short.

He has also put off until December, a decision on how Chicago will meet a state-mandated, $550 million payment to shore up police and fire pension funds that have assets to cover just 24 and 30 percent of their respective liabilities.

The Chicago pension bill is facing its own legal challenge. So is the mayor’s plan to phase out Chicago’s 55 percent subsidy for retiree health care.

But city attorneys are obviously concerned that, if the there’s a rigid interpretation of the pension guarantee in the state case, the Chicago pension-reform bill could suffer the same fate.

The pension changes took effect on Jan. 1. The higher contributions from city employees are being placed in escrow pending the outcome of the legal challenge.

Mayoral challengers Bob Fioretti and Jesus “Chuy” Garcia have repeatedly accused Emanuel of ignore the “elephant in the room” created by the pension crisis. But City Hall maintains that it “never tried to hide anything” and that Patton’s brief proves the point.

In a statement, the mayor’s office said: “Mayor Emanuel pledged that he would address the pension funding shortfalls to protect the retirements of our workers and respect the hard work of our taxpayers. The administration worked with about 30 different unions to achieve pension reform for more than 61,000 municipal and labor employees. This plan addressed half of the city’s pension issue. We have been and will continue talking with our other union partners in an attempt to address the remaining pension liabilities in a similar manner that protects our workers, as well as taxpayers. However, the process for achieving reform at a state level has slowed pending a decision regarding Illinois Senate Bill 1.”