CHICAGO
05/09/2013 03:49 pm ET Updated Jul 09, 2013

Illinois Pension Reform: Senate Passes Union-Backed Plan, Setting Stage For Showdown

AP

SPRINGFIELD, Ill., May 9 (Reuters) - The Illinois Senate on Thursday passed a labor union-backed bill to reduce the state's nearly $100 billion unfunded public pension liability, giving lawmakers dealing with America's worst-funded state retirement system a second option.

The 40-16 vote in the Democrat-controlled chamber sends the measure to the House, which last week passed a more comprehensive pension fix pushed by Democratic House Speaker Michael Madigan. Democrat John Cullerton, the Senate president, is chief sponsor of the bill the Senate approved on Thursday.

It was unclear which plan would prevail or whether some combination of both might pass before the spring legislative session ends on May 31.

Even as the Senate debated its version of pension reform, Madigan in the House held a hearing focused on a proposal to shift the cost of paying pensions from the state to local school districts, universities and community colleges.

Some state lawmakers and school officials have raised concerns the move would result in higher tuition and property tax hikes.

"This is going to happen. There will be a new plan. School districts are going to pay the pension costs for teachers and the others," Madigan said, adding he will release his proposal next week.

Costs arising from pension underfunding, caused by years of skipping or skimping on payments, are threatening the delivery of core state services such as education and health care. The pension crisis has pushed Illinois' credit rating to the lowest level among the states.

Cullerton, the Senate president, is in no hurry to bring the House version of pension reform - Madigan's proposal - to a vote in the Senate, said Rikeesha Phelon, Cullerton's spokeswoman.

A bill similar to Madigan's was soundly defeated in March, Phelon noted. "We first need to know that the vote count has changed" before taking up the Madigan bill, she said.

Cullerton's plan, negotiated with union officials, offers current workers and retirees a choice in how reductions in pension or health benefits would affect them.

"We feel that this bill obviously has strong sound constitutional principles. Other versions of pension reform are risky, and we know there's going to be litigation for sure," Cullerton said during debate ahead of the vote.

Cullerton's bill, however, would only shave the unfunded liability by as much as $15.7 billion and bring the system to a 90 percent funded level in 30 years. Madigan's bill calls for unilateral changes in pension benefits that are expected to cut $30 billion from the liability and uses savings over time to fully fund the system by 2044.

Senate Republicans, who largely voted against the measure, argued that Cullerton's bill does not go far enough to shore up the sagging pension system for teachers outside of Chicago, higher education workers, lawmakers, and state employees.

"This bill doesn't do enough to change the trajectory of our pension funds and you will be back here reliving this nightmare," said State Senator Matt Murphy.

Cullerton has said Madigan's bill would save Illinois nothing if unions were to prevail in an expected court battle. Unions have threatened a lawsuit to test whether the measure violates state constitutional protections against diminishing or impairing public worker retirement benefits.

Groups representing retired teachers and state workers have threatened lawsuits to challenge Cullerton's plan, too, but legal observers say Cullerton's approach is less vulnerable to a challenge.

Under Cullerton's plan, current workers would be given choices involving changes in cost-of-living adjustments for pensions, higher contributions, and the use of future raises to determine pension payments. In return for any concessions they make, workers would have access to state-sponsored health care in retirement.

Incentives offered in the Cullerton plan - called "considerations" in pension parlance - are designed to persuade workers to accept reductions in their pension benefits. The tradeoff would address the constitutional ban on reduction of pension benefits because retirees would actively select a consideration in return for giving up part of their promised pension.

The Cullerton plan does have some similarities to Madigan's bill. Like that measure, it also requires the state to make timely and adequate pension contributions and also exempts pension changes from collective bargaining.