By Joanne von Alroth and Karen Pierog
SPRINGFIELD, Illinois, Dec 3 (Reuters) - Illinois' Democratic-controlled legislature on Tuesday passed a landmark pension reform bill, choosing to address the state's crumbling finances over strong public labor union opposition to cuts in retirement benefits.
The bill addresses problems that have built up over decades in the nation's worst-funded state pension system, which is underfunded by $100 billion. The vote comes despite union threats to challenge pension reform in state court, based on claims it would violate a state constitution provision that guards against cuts to pension benefits.
Changes in the bill include reducing and suspending cost-of-living increases, raising retirement ages, and limiting the 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 a 62-53 vote after lengthy and at times emotional debate. It now heads to Governor Pat Quinn, who told reporters he hopes to sign the bill into law soon, although it will not take effect until June.
"I look forward to signing it," said Quinn, a Democrat. The vote in both houses, which required support from both Democrats and Republicans, was "a bipartisan victory for the state," he added.
Union opposition was a big obstacle to securing votes, said House Speaker Michael Madigan, a Democrat. "This was difficult because of the strength of the opposition and the intensity of the calls and contacts generated by organized labor for the Democrats," Madigan said.
With the state's finances buckling under a $100 billion unfunded pension liability, House Speaker Michael Madigan and others said the bill would save the state about $160 billion over 30 years and immediately reduce the unfunded liability by at least 20 percent.
Madigan noted that pension contributions already are eating up 20 percent of Illinois' general fund revenue. The cash-strapped state can no longer afford to pay for the retirement 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 will have no choice but to seek to uphold the Illinois Constitution and protect workers' life savings through legal action," the union group We Are One Illinois said in a statement.
The measure will affect nearly half a million current and retired public sector workers, according to a union spokesman. Unions argue the law violates a state constitutional prohibition against diminishing pension benefits.
Illinois will not be the first state to face a legal fight over pension changes. Rhode Island, which restructured its state pension system in 2011, is defending the move in state court.
Senate President John Cullerton said he welcomes any court challenges to the constitutionality of the reform measures in the bill.
Cullerton also said he is committed to passing reforms to ease the pension burden on local governments in Illinois.
Chicago Mayor Rahm Emanuel has pushed for reforms of the state pension system in the face of a looming state-mandated jump in pension payments for two of Chicago's four pension funds. Emanuel has indicated he cannot push forward with reform of Chicago's pensions until statewide reform takes shape.
"The pension crisis is not truly solved until relief is brought to Chicago and all of the other local governments across our state that are standing on the brink of a fiscal cliff because of our pension liabilities," Emanuel said in a statement. "Without providing the same relief to local governments, we know that taxpayers, employees, and the future of our state and local economies will remain at risk."
The affirmative vote on state reforms 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. It also followed 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 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 401(k)-like investment vehicle for retirement.
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 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.
Some lawmakers during the floor debates worried that Illinois could be in for another round of credit downgrades should the bill fail. Its passage could brighten the prospects for a $350 million bond sale Illinois has planned for next week.
"Any positive step will be embraced by the market," said Dan Heckman, municipals strategist at U.S. Bank, adding Illinois may still need more reforms or higher taxes.