Illinois Supreme Court strikes down Chicago pension reform but opens door for other changes

While striking down modest reforms to Chicago city-worker pensions, the Illinois Supreme Court has effectively given state lawmakers the green light on other avenues for pension reform.

The Illinois Supreme Court on March 24 struck down a state law designed to shore up two of Chicago’s city pension funds, ruling that the reform violates the state constitution’s pension clause. But the decision does suggest a way the state could adopt constitutional reforms in the future: by coming to benefit-adjustment agreements with employees, either individually or through their unions’ collective bargaining.

The reform bill the court struck down would have required taxpayers to pay more into Chicago’s municipal workers’ and laborers’ pension funds, and would have slightly increased city employees’ contributions to their own retirements. It would also have reduced cost-of-living adjustments for retired city employees.

The court ruled that making workers contribute more and receive lower cost-of-living adjustments than they expected would violate the state constitution’s pension clause, which says that government employees’ pension benefits “shall not be diminished or impaired.”

The decision came as no surprise, since last year the court struck down similar, modest reforms to state pension systems.

The decision is interesting, though, because it suggests a way the state could make reforms in the future that the court would uphold.

In trying to defend its reforms, the city used an argument that advocates of pension reform have long made: that the government can make changes to pension benefits “for consideration,” meaning the state can reduce an employee’s pension benefits if the employee voluntarily agrees to the reduction in exchange for some new benefit. The Illinois Appellate Court has said this would be permissible, but the Illinois Supreme Court has never directly addressed it.

The city argued that there was bargained-for consideration in this case because workers received a new benefit in the form of a funding guarantee. The “bargain” supposedly occurred when representatives of city-worker unions allegedly met and 28 of the 31 representatives voted to approve the changes.

The court correctly rejected that argument because the unions could not bind their members through that vote, which was not part of collective bargaining with the city.

But the court did acknowledge that “nothing prohibits an employee from knowingly and voluntarily agreeing to modify pension benefits from an employer in exchange for valid consideration from the employer.” That effectively gives the Illinois General Assembly the green light to pass reforms giving workers the option to trade some of their long-term pension benefits for less costly short-term benefits.

The decision also leaves open the possibility that unions could agree to such changes on their members’ behalf if they did it through a collective-bargaining agreement. That could make large-scale changes easier. And it should be permissible because workers represented by a union give the union the right to make a contract on their behalf through collective bargaining.

Allowing the state to make deals with employees, individually or through their unions, would be a step in the right direction, but additional reforms will be necessary to actually solve the Illinois and Chicago pension crises. Another step in the right direction, which certainly would be constitutional, would be to put all new government workers in a 401(k)-style plan instead of a defined-benefit pension system.

To go further and avoid eventual disaster, however, the state will need a constitutional amendment changing or repealing the pension clause. Today’s rejection of the state’s latest attempt at reform might help motivate Illinoisans to demand one.