CHICAGO (Reuters) - Illinois would shore up its sagging public employment retirement system under a plan outlined on Friday by Governor Pat Quinn that gives workers a choice between higher contributions and lower benefits.
With pension funding absorbing more and more of the state’s budget, Quinn said his plan would save taxpayers $65 billion to $85 billion over 30 years and help stop a further fall in the state’s relatively low credit ratings.
Illinois’ unfunded pension liability has grown to a huge $83 billion after the state skimped on funding for years. In fiscal 2013, which begins July 1, the state’s payment into the pension system will hit $5.2 billion, or 15 percent of general revenue spending - up substantially from 6 percent in 2008, according to the governor’s office.
Quinn, a Democrat, said his plan would leave the system, which covers state, local school, university and community college employees, 100 percent funded by 2042. Without it, he said Illinois will have expected payments totaling nearly $310 billion between 2012 and 2045, when a $32.7 billion unfunded liability would still remain.
“This plan rescues our pension system and allows public employees who have faithfully contributed to the system to continue to receive pension benefits,” he said.
Under the proposal, workers’ pension contributions would increase by 3 percent, while cost-of-living adjustments would be reduced. A retirement age of 67 would also be phased in.
Employees who accept the plan, which would need legislative approval, would continue to have their pay increases counted in their pension calculations and would receive a state subsidy for healthcare in retirement. Quinn added he expects at least 75 percent of workers to choose his plan.
Those workers who reject it will miss out on the healthcare subsidy and their pay increases will not be used to calculate their benefit payments, leaving them to receive lower pensions.
The choice is unfair and unconstitutional, Michael Carrigan, president of Illinois AFL-CIO, speaking on behalf of the public worker union coalition We Are One Illinois. Quinn’s proposal has “made the process of finding common ground much more difficult,” he added in a statement.
“Forcing public servants to choose between two sharply diminished pension plans is no choice at all,” Carrigan said. “It is a clearly illegal attempt to solve the problem caused by past governors and the legislature solely on the backs of teachers, caregivers and other public workers.”
The proposal is unusual because it would affect current employees. Most states attempting to fix underfunded pensions have modified only the pensions of new and future employees. That has allowed them to avoid the thorny questions of whether changing pension systems violates contracts or state constitutions. But it has left them with small, uncertain savings.
Rikeesha Phelon, a spokeswoman for Senate President John Cullerton, a Democrat, said the leader is pleased “that the governor’s proposal embraces the legal framework that will allow the state to control pension costs in a constitutional way.”
Quinn also called for schools, colleges and universities to eventually assume pension costs for their workers.
Republican leaders of the House and Senate called Quinn’s plan “a huge step in the right direction,” but expressed concern about shifting pension costs onto local property taxpayers.
Illinois is under the gun to fix its ailing pension system as the state continues a $43 billion, partly bond-financed capital program aimed at improving infrastructure and generating jobs, the governor said.
“It’s important when we issue our bonds that there is confidence and decent ratings,” he said.
Standard & Poor’s Ratings Services on Friday affirmed Illinois’ A-plus rating with a negative outlook, warning a downgrade could be triggered “if pension funding levels continue to deteriorate and the state makes no credible progress in addressing the liability.”
“Furthermore, we could also lower the rating by more than one notch if there is no progress on structural budget solutions and if Illinois does not address the significant pension liabilities and associated cost pressure,” S&P said in a statement.
On Thursday, Quinn began tackling another huge drag on the state’s finances - Medicaid, the healthcare program for the poor that has fueled a structural deficit as the state delays paying bills owed to providers.
When he unveiled his fiscal 2013, $33.7 billion general funds budget in February, Quinn put the Democratic-controlled legislature on notice that it has to address both Medicaid and pensions during their current session, which ends May 31.
Democratic House Speaker Michael Madigan continues to work with the governor on getting a balanced budget, with pensions and Medicaid being big parts of the equation, said Madigan spokesman Steve Brown.
Reporting by Karen Pierog, additional reporting by Lisa Lambert in Washington; Editing by James Dalgleish