On July 24, 2015, Judge Rita M. Novak of the Circuit Court of Cook County, Illinois struck down recently enacted legislation designed to shore up two of the City of Chicago's severely underfunded pension plans by, among other things, reducing benefits.1 Judge Novak viewed as controlling a decision by the Illinois Supreme Court from May of this year which held that similar legislation reducing benefits for members of state-funded pension plans violated the "pension protection clause" of the Illinois constitution. (See Cadwalader's memo on the Supreme Court's decision here). Unlike the State of Illinois, however, which was left with few options after its own pension reform legislation was struck down in May, Chicago has the potential to access chapter 9 of the United States Bankruptcy Code as a means of achieving pension reform.
The Challenge to Chicago's Pension Reform Legislation
Illinois law establishes retirement plans for all public employees in the State, including those employed by the City of Chicago. As required by the Illinois Pension Code, the City of Chicago currently contributes to four pension funds, including (i) the Municipal Employees' Annuity & Benefit Fund of Chicago ("MEABF") and (ii) the Laborers' & Retirement Board Employees' Annuity & Benefit Fund ("LABF"). MEABF and LABF both administer defined benefit pension plans under which participating public employees receive specified annuities upon retirement. These annuities include a three-percent automatic annual increase, which is compounded annually. MEABF and LABF are funded by employee and employer contributions, as well as by investment returns on the funds' assets. According to an expert cited by Judge Novak, MEABF and LABF, along with the City's other two pension funds, are significantly underfunded.
In 2011, Chicago Mayor Rahm Emanuel began working with 31 unions representing City workers in an effort to agree on pension reform legislation designed to address the underfunding of MEABF and LABF. Elected representatives of 28 of the 31 unions ultimately voted in favor of a legislative proposal (Public Act 98-641, or the "Act") that was subsequently enacted by the Illinois General Assembly. The Governor of Illinois signed the Act into law on June 9, 2014. Among other reforms, the Act changed the amount of annual increases, removed the compounding component of the annual increases, eliminated annual increases entirely in specified years, and postponed the time when annuitants would receive the initial increase. In addition, the Act provided for increases in both the employee and employer contribution levels. The Act also introduced two specific mechanisms to enforce the City's obligation to fund the pension plans.
In December 2014, just before the provisions of the Act were to become effective, a number of individual participants in MEABF and LABF, along with certain labor unions and other associations representing MEABF and LABF members...
