UPDATE 2-Illinois high court rules constitution protects health benefits

Thu Jul 3, 2014 1:42pm EDT

(Adds statements from governor, senate president, adds quote from Moody's, adds byline)

By Karl Plume

CHICAGO, July 3 (Reuters) - The Illinois Supreme Court decided Thursday that healthcare for retired state workers is a constitutionally protected pension benefit, a ruling with implications for pension reform legislation passed by the state legislature earlier this year.

The 6-to-1 decision allows the continuation of class-action challenges to a 2012 Illinois law that gave the state the right to impose healthcare insurance premiums on its retired workers. The challenge to the state effort to change healthcare benefits centered on a constitutional provision that membership in any public sector pension or retirement system "shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired."

"Health care benefits are not referred to in the pension clause, but neither is there any limitation imposed concerning them," the high court said. "It is a well settled principle that pension rights should be liberally construed in favor of the rights of the pensioner."

Retirees and others appealed a March 2013 ruling by Sangamon County Circuit Court Associate Judge Steven Nardulli, who found that state-sponsored health insurance is not a guaranteed pension benefit protected by the Illinois Constitution. In doing so, Nardulli dismissed class-action challenges backed by the state's labor unions.

The same provision in the Illinois Constitution is also the focus of lawsuits pending in Sangamon County Circuit Court against the pension reform law the state legislature passed in December. The law reduces and suspends cost-of-living increases for pensions, raises retirement ages and limits the salaries on which pensions are based.

A spokesperson for Governor Pat Quinn said the governor remains confident that the courts will uphold the pension reform law.

But Senate President John Cullerton said: "If the Court's decision is predictive, the challenge of reforming our pension systems will remain."

Christopher Mooney, director of the Illinois Institute of Government & Public Affairs at the University of Illinois, said before the ruling that a reversal of Nardulli's decision would indicate the pension reform law could be ruled unconstitutional.

"If you can't do health insurance, you can't do pensions either," Mooney said.

The preamble to Illinois' pension reform law concludes that the state's fiscal problems cannot be solved without changes to the retirement system. But Mooney said the argument is "not going to fly" because the state could raise revenue rather than cut benefits.

Judge John Belz, who is hearing the consolidated lawsuits, in May stopped the pension law from taking effect on June 1 until the challenges were resolved.

Illinois has had the worst-funded pension system among all U.S. states after decades of skipping or skimping on pension payments. As a result, credit rating agencies have slapped Illinois with the lowest ratings among states.

"It's too soon to say what the implications of this ruling are," said Moody's senior credit officer Ted Hampton. But he added that it "casts doubt" on the pension reform law.

Illinois' unfunded pension liability is $100 billion, while its unfunded liability for retiree healthcare stood at nearly $34.5 billion in fiscal 2013.

(Reporting by Karl Plume and Karen Pierog; Editing by Dan Grebler)