CHICAGO May 1 The Illinois Senate president and
labor leaders on Wednesday began pushing a new plan to reform
the nation's worst-funded state pension system that they believe
can pass an expected constitutional challenge while still saving
the state money.
The new plan would compete with another bill already on its
way to a vote in the state's House of Representatives.
The competing plans by two of the state's most powerful
Democratic leaders - Speaker of the House Mike Madigan and
Senate President John Cullerton - set the stage for a showdown
as the Illinois Legislature seeks to reform a pension system
that is underfunded by at least $96.8 billion.
Cullerton met with leaders of a coalition of union leaders
Wednesday in an effort to put together a plan that could
withstand an inevitable court challenge. In a statement,
Cullerton said the plan had a big enough impact on the state's
pension underfunding that he believes it can win approval from
the Democratic-controlled legislature.
He added that the leaders of the state's teachers,
nurses, police officers, and other public employee unions
"offered a credible and constitutional plan for consideration."
The state's constitution declares that pension benefits, once
granted, cannot be "diminished" during an employee's career or
Cullerton said he would present the plan to the state's
Democratic caucus and to speaker Madigan.
Details of the plan were not immediately clear, but State
Senator Linda Holmes, who was in the meeting, said the proposal
may include elements of a measure she previously had introduced,
including increased employee contributions and a requirement
that the state make pension payments according to an actuarial
Holmes noted Cullerton likely will continue promoting
elements of his own plan, which would give workers who agree to
lower cost-of-living adjustments to their pensions continued
access to state-sponsored health care in retirement.
The drama in the state capitol of Springfield has caught the
attention of investors who have purchased the state's general
obligation bonds, as well as the more than $17 billion of
pension bonds Illinois has sold since 2003 in an effort to begin
catching up on payments into its five state pension systems.
Richard Ciccarone, a managing director and chief research
officer at McDonnell Investment Management, said market concerns
will linger until any constitutional challenges have run their
"Until the state gets confirmation from the court that the
plan is valid, the issue is not likely to go away," he said,
referring to the House speaker's bill.
Madigan's plan sets a cap on salaries used to determine
pensions, limits cost-of-living adjustments on pensions for
future retirees, increases retirement ages for workers currently
under 45 years old, and hikes worker pension contributions by 1
percent over each of the next two fiscal years.
Additionally, the measure exempts pension changes from
Four of the state's five pension funds - covering more than
190,000 retirees and nearly 270,000 active workers - would be
affected by Madigan's bill. The judges union is exempt.
The plan was sent to the House floor on Wednesday after a
brief committee hearing that produced a 9-1 vote.
At the hearing, Henry Baer, executive director of the
American Federation of State, County and Municipal Employees
Council 31, which represents 46,000 state and university
employees, said state lawmakers seem to be determined to stop
kicking the pension problems down the road.
"It's a good thing you're not kicking the can down the
road," Baer said. "It's a bad thing that you're kicking our
members in the butt."
Without reform, payments for retirement funds and for debt
service on pension bonds are expected to total $7.7 billion in
fiscal 2014, or almost a quarter of the state's general fund
Madigan's amendment is similar to a previous bill that did
not pass, which would have reduced Illinois' annual pension
payment by $2 billion and cut the unfunded liability by $30
State Senator Daniel Biss, a key sponsor of the failed bill,
said lawmakers are coming to grips with the difficulty of
pension reform. "When the issue is this hard, this emotionally
complicated, this financially complicated, this politically
complicated, it's brutal to get something done," Biss said.
Investors have been demanding hefty yields for Illinois'
general obligation debt. The state's so-called credit spread was
140 basis points over Municipal Market Data's benchmark triple-A
scale in the latest week - the second-highest among major muni
issuers tracked by MMD.
Illinois' A2 rating, the lowest among states, could be
downgraded further if no comprehensive pension fix passes, said
Ted Hampton, an analyst at Moody's Investors Service.
"It would be more evidence the state can't come to grips
with this politically," he said, adding that Moody's was
monitoring developments in the legislature.