December 16, 2014 / 7:00 PM / 4 years ago

UPDATE 2-Unions, retirees sue to block Chicago pension changes

(New throughout, adds Illinois pension reform litigation and recent rulings, comment from union spokesman)

By Karen Pierog

CHICAGO, Dec 16 (Reuters) - Chicago public employee unions and others on Tuesday opened a new front in the battle over pension cuts for public workers, suing to block a law aimed at shoring up funding for two of the city’s public pension systems.

The lawsuit contends that the law, enacted in June, violates the Illinois Constitution by reducing pension benefits for workers and retirees in Chicago’s Municipal Employees Annuity and Benefit Fund. The suit was filed in Cook County Circuit Court by the Chicago Teachers Union, the American Federation of State, County and Municipal Employees Council 31 and others.

The lawsuit asks the court to declare the law void and illegal because pensions will be reduced in violation of a constitutional provision prohibiting the diminishment or impairment of public employee retirement benefits.

A similar argument by unions and others led to a Nov. 21 Sangamon County Circuit Court ruling that tossed Illinois’ 2013 pension reform law for being unconstitutional. The Illinois Supreme Court will hear arguments in March over the state’s appeal of that ruling.

Illinois has the worst-funded state pension fund, while Chicago is struggling with a huge pension funding burden. Moody’s Investors Service has said the city is an “extreme outlier” among U.S. local governments it rates, citing a $32 billion adjusted net pension liability that is equal to eight times operating revenue.

A hearing on a temporary restraining order to stop the Jan.1 implementation of Chicago’s pension law is set for Dec. 29, according to AFSCME spokesman Anders Lindall. He said last month’s ruling on Illinois’ law, along with a state supreme court ruling in July over state retiree health care, have reinforced constitutional protections for retirement benefits.

Under the law, Chicago’s payments to its municipal and laborers’ retirement systems increase over five years. Workers’ current contributions of 8.5 percent of earnings rise to 11 percent over five years. Instead of receiving an annual 3 percent cost-of-living hike, the bulk of retirees will receive increases tied to inflation and skipped in certain years.

In a statement, Chicago Mayor Rahm Emanuel said the law, crafted with the support of many of Chicago’s unions, is constitutional and is needed to ensure 61,000 city workers and retirees get their pensions.

“Without this reform, these two funds will run out of money in just a matter of years, which is why we must defend this law to protect the future of our workers, retirees, and taxpayers,” he said.

Emanuel’s office has warned that the municipal and laborers’ systems face insolvency within nine to 17 years unless changes are made. The funding shortfall is $8.4 billion for the municipal system and $1 billion for the laborers system, according to city documents.

Severe pension funding problems led Moody’s to cut Chicago’s credit rating four notches since July 2013 to Baa1. (Reporting by Karen Pierog; editing by Diane Craft, Leslie Adler and David Gregorio)

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