Illinois lawmakers pass long-awaited pension reform

Reuters

By Joanne von Alroth and Karen Pierog

SPRINGFIELD, Illinois, Dec 3 (Reuters) - Illinois'Democratic-controlled legislature on Tuesday passed a landmarkpension reform bill, choosing to address the state's crumblingfinances over strong public labor union opposition to cuts inretirement benefits.

The bill addresses problems that have built up over decadesin the nation's worst-funded state pension system, which isunderfunded by $100 billion. The vote comes despite unionthreats to challenge pension reform in state court, based onclaims it would violate a state constitution provision thatguards against cuts to pension benefits.

Changes in the bill include reducing and suspendingcost-of-living increases, raising retirement ages, and limitingthe salaries on which pensions are based.

Championed by Democratic and Republican legislative leaders,the bill passed the Senate in a 30-24 vote and the House in a62-53 vote after lengthy and at times emotional debate. It nowheads to Governor Pat Quinn, who told reporters he hopes to signthe bill into law soon, although it will not take effect untilJune.

"I look forward to signing it," said Quinn, a Democrat. Thevote in both houses, which required support from both Democratsand Republicans, was "a bipartisan victory for the state," headded.

Union opposition was a big obstacle to securing votes, saidHouse Speaker Michael Madigan, a Democrat. "This was difficultbecause of the strength of the opposition and the intensity ofthe calls and contacts generated by organized labor for theDemocrats," Madigan said.

With the state's finances buckling under a $100 billionunfunded pension liability, House Speaker Michael Madigan andothers said the bill would save the state about $160 billionover 30 years and immediately reduce the unfunded liability byat least 20 percent.

Madigan noted that pension contributions already are eatingup 20 percent of Illinois' general fund revenue. Thecash-strapped state can no longer afford to pay for theretirement promises made to teachers and state government,university and college workers, he said.

Labor unions called on Quinn to veto the "unfair,unconstitutional bill. If he doesn't, our union coalition willhave no choice but to seek to uphold the Illinois Constitutionand protect workers' life savings through legal action," theunion group We Are One Illinois said in a statement.

The measure will affect nearly half a million current andretired public sector workers, according to a union spokesman.Unions argue the law violates a state constitutional prohibitionagainst diminishing pension benefits.

Illinois will not be the first state to face a legal fightover pension changes. Rhode Island, which restructured its statepension system in 2011, is defending the move in state court.

CHICAGO NEXT?

Senate President John Cullerton said he welcomes any courtchallenges to the constitutionality of the reform measures inthe bill.

Cullerton also said he is committed to passing reforms toease the pension burden on local governments in Illinois.

Chicago Mayor Rahm Emanuel has pushed for reforms of thestate pension system in the face of a looming state-mandatedjump in pension payments for two of Chicago's four pensionfunds. Emanuel has indicated he cannot push forward with reformof Chicago's pensions until statewide reform takes shape.

"The pension crisis is not truly solved until relief isbrought to Chicago and all of the other local governments acrossour state that are standing on the brink of a fiscal cliffbecause of our pension liabilities," Emanuel said in astatement. "Without providing the same relief to localgovernments, we know that taxpayers, employees, and the futureof our state and local economies will remain at risk."

The affirmative vote on state reforms came after a failedeffort in the legislature's spring session, a summer ofwrangling by a special legislative committee, and weeks ofclosed-door talks among the leaders. It also followed years ofdiscussion and study, previous reform measures that providedlimited improvements or failed to pass, and numerous downgradesof the state's credit ratings.

The measure offers some sweeteners for workers and retirees.Employees would contribute 1 percent less of their salariestoward pensions, while contributions from the state, which hasskipped or skimped on its pension payments over the years, wouldbe enforced by the Illinois Supreme Court. A limited number ofworkers would also have the option to choose a 401(k)-likeinvestment vehicle for retirement.

In a preamble section, the bill lays out an argumentseemingly designed to thwart a potential constitutionalchallenge. The state's finances are so squeezed by pensionpayments, the section argues, that Illinois has been forced tocut funding for core services such as health care and education.The preamble also alludes to Illinois' structural budgetdeficit, fueled by billions of dollars in unpaid bills spillingfrom one fiscal year to another.

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

"Having considered other alternatives that would not involvechanges to the retirement systems, the General Assembly hasdetermined that the fiscal problems facing the state and itsretirement systems cannot be solved without making some changesto the structure of the retirement systems," the preamblestates.

Some lawmakers during the floor debates worried thatIllinois could be in for another round of credit downgradesshould the bill fail. Its passage could brighten the prospectsfor a $350 million bond sale Illinois has planned for next week.

"Any positive step will be embraced by the market," said DanHeckman, municipals strategist at U.S. Bank, adding Illinois maystill need more reforms or higher taxes.

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