Muni Credit News

Joseph Krist

Municipal Credit Consultant

Pension liabilities are increasingly moving front and center in the analysis of municipal credits. As states and cities attempt to make adjustments to future benefits for their employees, resistance from those employees has led to increasing litigation in the state and federal courts on this matter. This issue of Muni Credit News discusses two recent court decisions impacting those efforts to change benefits – one state and one federal – which had differing results for the cities involved.

CHICAGO OPEB DECISION – THE DEVIL WAS IN THE DETAILS

Recently a hearing was held in ongoing litigation between the City of Chicago and its employees over efforts by the City to reduce its expenses related to other post employment benefits (OPEB) primarily healthcare expenses. Last week, a Cook County judged ruled on motions filed by the employees to compel the City to provide “lifetime healthcare benefits”.

The decisions rendered by the Court were a mixed bag for the City. In one ruling against the City, for three classes of employees, terms established under 1983 and 1985 amendments to their benefit packages were not time-limited and were in effect when the those classes entered into the Funds’ retirement systems. They provided those sub-class annuitants with healthcare benefits which were “lifetime” or “permanent”. Krislov & Associates, who represents the fund members who filed the lawsuit  put the number of employees hired before the 1989 cutoff at about 20,000.

For benefits established under 1989, 1997 and 2003 amendments to the Illinois Pension Code, the judge ruled that they were time­ limited at creation. By their express terms, these amendments specifically did not provide the annuitants with “lifetime” or “permanent” healthcare benefits. Rather, the annuitants who became members of the retirement systems during the effective period of these amendments could, and d id, agree to the amended time-limited healthcare benefits as conditions of their membership in the system.

Accordingly, the Court ruled that  a cause of action for relief to employees as to the City’s and Funds’ obligations under the 1983 and 1985 amendments exists, but claims under the 1989, 1997 and 2003 amendments were dismissed with prejudice.

The employees argued that the City of Chicago Annuitant Medical Benefits Plan handbook (“City Handbook”) constitutes a binding agreement requiring the City to provide lifetime subsidized healthcare premiums. The Court found that the Handbook’s provision for termination of the Plan clearly contradicts any contractual obligation to provide lifetime healthcare benefits. The Police Handbook does not contain any provision promising lifetime subsidized healthcare benefits. Because Plaintiffs failed to show the existence of any valid contract for the provision of lifetime subsidized healthcare benefits, that claim is dismissed with prejudice.

The City argued that all of Plaintiffs’ claims under the 1983 and 1985 amendments are barred by the statute of limitations. The Firemen and Municipal Funds contended that all of Plaintiffs’ claims arising under each of the amendments to the Pension Code are time-barred. Initially, Plaintiffs argued that the City waived this argument by not raising it on the City’s motion to dismiss the Amended Complaint. However, the City asserted this defense after this court ruled that the city has a derivative obligation to provide, through the collection of the special tax levy, the monies used by the Funds to subsidize/provide healthcare for the Funds’ annuitants. Therefore, the City did not waive its right to assert a statute of limitations defense. Because the rights claimed by Plaintiffs under the Pension Clause are contract based,  the ten-year statute of limitations applies.

One class of employees known as Sub Class 3 did receive for now, a favorable ruling. The Court said that the Sub-Class 3 annuitants were not parties to the original  litigation, let alone the later settlement agreement. Indeed, the exact language of the 1989 settlement agreement only covers the Korshak and Window Sub-Class annuitants. The original litigants could not bind the non-party Sub-Class 3 participants to the 1989 settlement agreement, nor could the non-party Sub-Class 3 participants have preserved any of their claims through that 1989 settlement. So, the court ruled it has not been established when members of Sub-Class 3 knew or should have known of any claims they possessed.

The court would not assume that the members of Sub-Class 3 were aware of the facts in the I987 litigation or were put on notice of the potential for their claims against the Funds. Nor would the court assume without sufficient evidence as to how many, if any, of the Sub­ Class 3 participants either knew of the terms of the 1989 settlement agreement or, as of August 23, 1989, “had a reasonable belief that their injury was caused by wrongful conduct” of  the City or the Funds.  The Court said that speculation about the matter was not  a sufficient basis upon which to grant the current Motion to Dismiss.

A status hearing is set for Aug. 11. The city could seek to settle the case, offering some sort of payout to compensate for the lost subsidies to resolve the dispute and obtain more clarity in financial planning going forward, or the litigation could go on. The city’s recently released 2015 certified annual financial results showed a reduction in the unfunded OPEB liability to $781 million from $965 million.

FEDERAL PENSION RULING FAVORS TEXAS CITY

Fort Worth operates a defined benefits pension plan for the benefit of its employees. All of the plaintiffs are vested members of the plan. At the time each of the plaintiffs vested, the three highest annual salaries received by the retiring employee were averaged to reach a base amount, which was then multiplied by the employee’s years of service and then subjected to a 3% multiplier. The plaintiffs also had the right to a cost-of-living adjustment, or “COLA.” Like most public pension plans in Texas, Fort Worth’s is underfunded. Over the years, Fort Worth has sought to improve the financial condition of its pension plan. In 2012, the City made two primary changes.  For new employees, it replaced existing formula to one averaging the five highest paid years. It also uses a 2.5% multiplier instead of a 3% multiplier.

The second noteworthy change concerned the COLA. The City eliminated cost-of-living adjustments for future employees, provided that current employees would instead receive a simple 2% COLA, and allowed current employees who had previously taken the ad hoc COLA “to revert to 2% simple.” Due to a collective bargaining agreement, City firefighters were not affected but shortly after that agreement expired, however, the City imposed essentially the same reform on its firefighters. Two lawsuits us challenged those ordinances – one by a pair of police officers, the other by a trio of firefighters.

Both cases were resolved at the summary judgment stage. State law under Section 66(d) provides that on or after the effective date of this section, a change in service or disability retirement benefits or  death  benefits of a retirement system may not reduce or otherwise impair benefits accrued by a person if the person could have terminated employment or has terminated employment before the effective date of the change; and would have been eligible for those benefits, without accumulating additional service under the retirement system, on any date on or after the effective date of the change had the change not occurred. Section 66(d) applies to all non-statewide public retirement systems except in San Antonio and in political subdivisions where voters have rejected it by ballot measure.

The Court had to decide whether Section 66 prohibits pension reform that would decrease expected but as-yet unearned benefits. This case came down to the meaning of the word accrued. The Court found that Benefits accrue on an ongoing basis as service is performed, and accrued benefits are those benefits that have been earned to date. Meanwhile, vesting is a one-time event giving rise to a right to the accrued benefits. “In summary, the notion of benefit accrual quantifies actual benefit accumulations. The Court found that the term “benefits” refers to payments and does not encompass the formula by which those payments are calculated. It stated that when it comes to public pension protection, Texas is known to be an outlier, citing literature that notes that Texas as one of only two states that takes a “gratuity approach” to public pensions, meaning pension benefits are viewed as gratuity rather than a contractual or statutory right.

The Court concluded that Section 66 permits prospective changes to the pension plans of the public employees within its reach. If the changes to the pension plan impact only benefits that have not yet accrued, amendment is permissible. It went further and said that the reform has been designed to protect all accrued benefits while impacting only the rate at which future benefits accrue. This aspect of the Pension Reform therefore passes constitutional muster.

This is a definite win for Texas cities. The Texas courts and the state legislature have weighed in on the subject and now cities, absent further state action, have firm guidance on how they can deal with their pension liabilities. We see this as credit positive for Texas cities with unfunded pension liability issues.

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