July 28, 2015

Chicago Running Out of Options after Pension Reform Law Overturned

By Bellwether

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*Cross posted from Teacherpensions.org’s blog.

It’s back to square one for Chicago pensions: last Friday a city judge ruled unconstitutional a pension law that would have reduced benefits for city workers. The ruling is a tough blow for the city’s finances and could worsen the situation for new and future workers, including teachers.

For Illinois taxpayers, it feels a lot like Groundhog Day. Chicago’s pension reform law, albeit a slightly different spin, like the state’s 2013 pension reform law, attempted to reduce cost-of-living adjustments for current workers. And like the state law, the city court says the cuts violate the state’s constitution. Even if the case goes to appeal, it’s highly likely that the city’s attempt to cut benefits will again be deemed illegal just like the state’s attempt, which was finally upheld as unconstitutional last spring.

Paying the price for massive debt are the city’s workers. On the books, the city judge’s ruling is a win for the Chicago Teachers’ Union and other unions who filed the suit. But it’s a significant loss overall for the city’s new and future workers and teachers who now need to eat the costs of growing debt. Chicago, like the state, already instituted drastic cuts for its new teachers through a previous plan in 2011. New teachers hired after 2011 face negative net benefits for the first two decades of work because the value of their contributions exceed their future pension benefits. And they don’t qualify for Social Security. For the city’s schools, last year’s pension contributions ate up 11 percent of the Chicago Public Schools’ operating budget, or nearly $1,600 per student.

Chicago is running out of options. Without the pension law, which would have allowed the court to enforce full funding to the laborer’s and municipal employees funds, the city lacks any checks to ensure adequate funding. Moody’s recently downgraded the Chicago Public Schools’ debt ratings to junk status, now matching the city’s rating, because of poorly funded pensions; the S&P cut the city’s rating again because of chronic structural debt. Governor Bruce Rauner’s recent pension bill would allow Chicago and other municipalities to file for bankruptcy, a mechanism which would allow the city to start over,restructure its past debt, and reform its pensions plans (but even in this case, there would be obstaclesaround when Chicago could actually file because of the way the city reports its debt).

The city desperately needs structural reform to clean up its financial mess and to ensure adequate benefits for its teachers and municipal workers. Until then, Chicago’s public workers, teachers, and taxpayers will be expected to foot the bill.

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