Illinois lawmakers to vote Tues on long-awaited pension reform

CHICAGO Tue Dec 3, 2013 1:00am EST

CHICAGO Dec 3 (Reuters) - Illinois legislators will gather at the state capitol on Tuesday to decide whether the nation's worst-funded state pension system is finally ready for reform.

Following years of discussion and study, previous reform measures that provided limited improvements or failed to pass, and numerous downgrades of the state's credit ratings, the answer lies with the Democrat-controlled legislature. At a special, one-day session on Tuesday, lawmakers will take up a bill that raises retirement ages, reduces and suspends cost-of-living increases for pensions, and limits the salaries on which pensions are based.

Democratic and Republican leaders of the House and Senate last Wednesday announced a deal on a plan aimed at saving Illinois an estimated $160 billion over 30 years. The plan came after a failed effort in the legislature's spring session, a summer of wrangling by a special legislative committee, and weeks of closed-door talks among the leaders.

The compromise plan has been attacked by public labor unions, which claim any imposed cuts to pensions would violate the state constitution. It has received criticism from a prominent conservative Illinois think tank. It also has drawn mixed reviews from Republicans who are seeking to unseat Governor Pat Quinn, a Democrat, in the state's 2014 gubernatorial election.

Illinois has a nearly $100 billion unfunded pension liability. It also has the lowest credit ratings among states.

The fact that the leaders called members back for Tuesday's session should be a positive sign for the bill's prospects, according to Christopher Mooney, director of the Illinois Institute of Government & Public Affairs at the University of Illinois.

"It looks like the skids are greased and it's going to happen, but it's still a tough vote," Mooney said. A failed vote would be a "huge embarrassment" for the leaders, particularly for Democratic House Speaker Michael Madigan and Senate President John Cullerton, he added.

The vote comes after Monday's filing deadline for candidates in the March primary election for House and Senate seats, and Mooney said the timing will give some lawmakers political cover.

Tyrone Fahner, president of the Civic Committee of The Commercial Club of Chicago, a business group that has pushed for pension reform for years, called the bill "an excellent plan" and predicted it would pass.

While the measure has strong support from business groups, labor unions have been mobilizing teachers, state police, and other unionized public-sector workers to derail the bill. The labor coalition "We Are One Illinois" asked its members to flood lawmakers with calls.

The new measure offers some sweeteners for workers and retirees. Employees would contribute 1 percent less of their salaries toward pensions, while contributions from the state, which has skipped or skimped on its pension payments over the years, would be enforced by the Illinois Supreme Court. A limited number of workers would also have the option to choose a 401k-like investment vehicle for retirement.

The legislature ended its spring session on May 31 at an impasse over whether to impose pension changes on workers and retirees or give them a choice between benefit cuts and access to state-sponsored health care in retirement.

Unions have threatened to use strong protections for public worker retirement benefits in the Illinois Constitution to fight imposed pension changes.

In a preamble section, the bill lays out an argument seemingly designed to thwart a potential constitutional challenge. The state's finances are so squeezed by pension payments, the section argues, that Illinois has been forced to cut funding for core state services such as health care and education. The preamble also alludes to Illinois' structural budget deficit, fueled by billions of dollars in unpaid bills spilling from one fiscal year to another.

Continued inaction on pension reform has hurt ratings on Illinois debt, with credit agencies warning of further downgrades, and investors in the U.S. municipal bond market are demanding higher yields to hold the state's bonds.

"Having considered other alternatives that would not involve changes to the retirement systems, the General Assembly has determined that the fiscal problems facing the state and its retirement systems cannot be solved without making some changes to the structure of the retirement systems," the preamble states.

State Senator Daniel Biss, a Democrat, said the bill seeks to treat retirees fairly. "There really is the sense that there is some fairness to this bill," he said. "And the bill does achieve its savings by making changes for those who we believe are truly in the best position to make adjustments."

On Tuesday morning, the measure will first go before a special bipartisan panel on pension reform created in June.

As a vote on pension reform looms, Illinois is readying the sale of $350 million of taxable general obligation bonds for next week.

Illinois is already paying the second-biggest credit penalty, behind Puerto Rico, among large municipal debt issuers tracked by Municipal Market Data, a unit of Thomson Reuters. The state's so-called credit spread stood at 173 basis points over MMD's benchmark triple-A yield scale in the latest week. By contrast, California's credit spread is only 51 basis points, while New York City's is 49 basis points.