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Illinois Supreme Court to hear retiree health care case

CHICAGO (Reuters) - The Illinois Supreme Court agreed on Thursday to determine whether healthcare for retired state workers is protected under the state constitution, stepping into the debate over reining in the state's huge public pension costs.

The high court accepted a direct appeal of a March 19 ruling by Sangamon County Circuit Court Associate Judge Steven Nardulli, who found that state-sponsored retiree health benefits, unlike pensions, are not protected by the Illinois Constitution.

Illinois' efforts to deal with nearly $100 billion in unfunded pension liabilities have been hampered in part by a restriction in the state's constitution, which calls participation in a pension plan "an enforceable contractual relationship, the benefits of which shall not be diminished or impaired."

Nardulli's ruling raised questions about how state lawmakers might deal with retiree health programs, which were underfunded by $33.3 billion at the end of fiscal 2011, according to the state, and are not specifically mentioned in the state constitution.

At least one pension-reform proposal in the state legislature relies on health benefits as part of the pension fix. The plan, supported by Senate President John Cullerton, would use retiree health benefits as a lever for inducing workers and retirees to agree to a cut in cost-of-living adjustments on their pension payments. Under the plan, workers who insist on keeping their cost-of-living increases would lose their retiree health benefits.

The Senate already has passed a measure that takes this approach with the Teachers Retirement System, the largest of Illinois' five state pension funds.

The bill would offer continuation of state-sponsored retiree health care to employees and retirees who agree to accept less than the current annual 3 percent compounded cost-of-living adjustment to their pensions. Teachers who would not agree to the cost-of-living cut would not be eligible for state-backed health coverage.

If Nardulli's ruling is overturned by the Supreme Court, the state's options for reforming pensions would be limited. An approach that relies solely on changes to pensions is both politically difficult and legally vulnerable. Union leaders have said they would sue, on constitutional grounds, to prevent implementation of any cuts to pension benefits.

The state supreme court is unlikely to hear oral arguments on the medical benefits case before September, court spokesman Joe Tybor said. The Democrat-controlled legislature is attempting to pass a fix for the worst-funded public pension system among states during its spring session that ends May 31.

Nardulli's ruling dismissed class-action challenges to a 2012 Illinois law that gave the state the ability to raise health care premiums for retirees.

The American Federation of State, County and Municipal Employees Council 31 and other unions had backed the lawsuit, arguing that retiree health care coverage carried the same constitutional protection as pensions. They also contended the 2012 law would saddle state and university retirees with unaffordable premium increases.

The House and Senate have passed bills addressing pieces of the pension reform puzzle and are seeking a comprehensive fix before the legislature ends its spring session on May 31.

Pensions are devouring an ever-increasing share of state revenue. That is a worry for the state's bondholders, as well as vendors, school districts and others doing business with a state that is running as much as a year behind on $9 billion in unpaid bills. Studies have shown Illinois' five pension plans have the lowest funding ratio of any state in the nation.

(Reporting by Karen Pierog; Editing by Bob Burgdorfer)

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