In a major blow to Chicago's already weak finances, a Cook County judge today rejected on constitutional grounds a plan to restructure two of the city's underfunded pension plans.

Judge Rita Novak ruled that, though the measure includes higher city contributions, it also improperly would force workers to accept reduced benefits, including a lower cost-of-living allowance every year.

Unless it's overturned on appeal, the decision means the city will have to start over and taxpayers potentially will have to pick up the entire tab for the billions of extra dollars needed to return the laborers' and municipal workers' pension funds to adequate levels.

Mayor Rahm Emanuel, who got state lawmakers to sign off on the plan that was rejected, has given no indication what Plan B might be.

FUNDS' SHORTFALL

The municipal workers' pension has just 42.1 percent of the assets it needs, with an unfunded liability of $7.13 billion, according to a July 20 financial report distributed to potential buyers of the city's most recent bond offering.

The much smaller laborers' pension has 65.9 percent of the assets it needs, with an unfunded liability of $719.0 million.

The municipal workers' fund is projected to run out of money in 2026, with the laborers' becoming insolvent three years later.

The consequences of insolvency are uncertain, but if the city is required to pay pensions as they become due—so-called pay-as-you-go funding—the amounts would be staggering. The city's annual contribution would soar to $1.11 billion in 2026, when the municipal workers' pension fund is expected to run out of money. Three years later, when the laborers' fund is expected to run dry, the pay-as-you-go payment would be $99.6 million.

However, as a result of today's ruling, the city won't have to pay an additional $94.9 million next year to the two funds. Under the law that has been struck down, the city's combined contribution would have increased 55 percent, to $266.7 million in 2016, from $171.8 million that would have been due under the old law.

CITY'S ARGUMENT

The city had argued that unlike changes in state pension plans, which recently were tossed by the Illinois Supreme Court, its changes were more defensible, since Chicago's pension obligations accrued to the pension funds themselves and not the city. But Judge Novak dismissed that argument with a legal shrug.

“Contrary to the city's argument, it is not the pension code that creates the contractual relationship,” she wrote. “The contractual relationship that is mandated derives from the constitution, and so does the 'enforceable obligation' to pay the benefits.”

In other words: Pay up, even if the city offers workers other things in exchange for pension cuts. “Pension benefits cannot be 'netted' against funding schemes. . . .To do so would render the rights guaranteed by the pension protection clause (of the constitution) illusory.”

Novak's ruling went so far as to invalidate the first year of higher pension payments being made by workers. Everything collected so far now will have to be returned.

UNIONS CELEBRATE

City officials so far have not commented, but union officials held their own court outside Novak's courtroom and were jubilant.

“This is a win for all city residents,” AFSCME spokesman Anders Lindall said, since unionized workers are “the backbone” of middle-class neighborhoods. “The highest law of the state, the constitution, has meaning. A pension is a promise.”

The average city annuitant in the two funds makes about $32,000 a year and cannot afford to lose any of it, Lindall said. “This is a world-class city that has plenty of wealth,” he added, suggesting that the city must find other ways to solve its budget problems: “close corporate loopholes,” use money in tax-increment financing accounts and, if need be, “raise fees and property taxes.”

The Civic Federation, in a statement, suggested very disturbing actions are coming as a result of the decision.

“The reforms struck down today were critical to the survival of the funds,” which now pay 3 percent compounded annual cost-of-living hikes to annuitants, even though inflation has been running just 1 percent a year. “Without these reforms, the city reverts back to an inadequate funding formula that has resulted in such severe underfunding that actuaries expect the municipal and laborers funds will run out of money within the next decade—an unthinkable prospect.”

The federation urged the city to appeal and the state to provide some financial assistance.

Today's decision does not apply to workers in the two funds who were hired after Jan 1, 2011. They're already in a pension plan that requires them to pay more and accept lesser benefits.

Nor does it apply to a separate measure covering city police and firefighters. Under that deal struck by the mayor, the city would have more time to pay up, but benefits would not be cut. A bill enacting the changes cleared the Legislature but needs the signature of Gov. Bruce Rauner, who has not indicated whether he's willing to sign without conditions.

MORE BAD NEWS

Later this morning, two of the major bond-rating agencies came out with statements, and the news is not good.

The worst is Standard & Poor's, which said today's decision “means more hurdles for the city in its attempt to address its growing pension liabilities.” Adds S&P, “We will likely lower our GO rating within the next six months if the city fails to incorporate pension contributions in a structurally balanced manner.”

Moody's was more gentle, but it already has the city's debt at junk levels and had expected a negative decision today. “The decision is credit neutral for Chicago, as we expect it will be appealed to the Illinois Supreme Court, which will ultimately determine the constitutionality of the legislation,” it said.

Noon update:

The city finally is out with a statement, and it says little beyond that it “looks forward to having our arguments heard” by the Supreme Court.

Good luck with that one, guys. Sounds like there is no Plan B.

Crain's Thomas A. Corfman contributed to this report.

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