By Dave McKinney
CHICAGO (Reuters) - The Illinois Supreme Court on Thursday delivered a fiscally jolting but not surprising hit to Chicago by invalidating a 2014 state law aimed at boosting the sinking finances of two city pension funds, saying the law violated pension protections in the state's constitution.
The decision by the seven-member court to uphold a lower court ruling was an expected blow to the law that would have increased municipal worker and laborer pension contributions and ended a compounding 3 percent annual increase for retirees.
The court did not dispute arguments that a fiscal crisis could make the funds insolvent, but said higher pension premiums and reduced retiree benefits impaired public-pension rights guaranteed by the constitution.
Those "annuity reducing provisions contravene the pension protection clause's absolute prohibition against diminishment of pension benefits and exceed the General Assembly's authority," Justice Mary Jane Theis wrote in the court's opinion.
The decision, with five justices concurring and none dissenting, was expected after the court used the same legal foundation to invalidate a 2013 law that sought to cut pensions for state government workers.
A bloc of four public-sector unions that opposed the city pension cuts said Thursday's ruling "makes clear again that the politicians who ran up the debt cannot run out on the bill or dump the burden on public-service workers and retirees instead."
Chicago, the nation's third-biggest city, has been mired in a financial crisis largely fueled by a $20 billion unfunded pension liability in its four retirement systems.
Combined, the two Chicago pension funds at the center of Thursday's ruling cover more than 78,000 active or inactive city employees and retirees but have unfunded liabilities exceeding $8 billion.
Without reforms, Chicago warned that the two funds would run out of money within 10 to 13 years.
There was no immediate reaction to the ruling from Chicago Mayor Rahm Emanuel's office.
The court's decision did not impact trading in Chicago general obligation bonds Thursday.
"I believe the decision was largely expected and therefore probably priced in," said Greg Saulnier, a market analyst at Municipal Market Data, a unit of Thomson Reuters.
Moody's Investors Services predicted Thursday's decision would worsen Chicago's finances.
"Absent substantial budgetary adjustments, Chicago’s pension debt will grow for many years and, along with the court invalidating the savings achieved with the city’s reform, will continue to drive the city’s fixed costs higher," said David Jacobson, a spokesman for the bond-rating agency.
(Additional reporting by Karen Pierog; Writing by Fiona Ortiz; Editing by W Simon and Bernadette Baum)