12/31/2012 04:10 pm ET Updated Mar 03, 2013

Illinois Pension Crisis: State Lawmakers Pursue Elusive Deal To Fix State Pension Systems

By Karen Pierog

CHICAGO, Dec 31 (Reuters) - Illinois lawmakers on Wednesday resume efforts to fix the state's woefully underfunded state pension systems even as a new forecast suggested that the state will have to come up with $1.1 billion more in the next fiscal year to fund state pensions.

Legislators will begin meeting on Jan. 2 for the final time before a newly-elected legislature takes office later in the month. The so-called lame duck session is considered a good time to pass controversial measures because some lawmakers are retiring or were defeated and no longer have to answer to voters at the polls.

But as the start of the session approached, hopes of a deal have diminished.

Democratic Governor Pat Quinn has been pushing for action, warning that the pension liability grows by about $17 million a day and the state's credit ratings could be lowered further.

That push got stronger after Moody's Investors Service on Dec. 13 revised Illinois' credit outlook to negative from stable and warned that a failure to deal with the state's $96.8 billion unfunded pension liability could lead to a downgrade.

Illinois' A2 rating is already the lowest among the U.S. states rated by Moody's.

Quinn has also warned that pension payments were crowding out funding for essential state services. State contributions to the pension funds required by law have jumped in recent years.

The pension funds are seeking required state contributions totaling $6.87 billion in fiscal 2014, which begins next summer, according to a State Actuary's report released on Monday.

That would be an increase of nearly $1.1 billion from the $5.79 billion required contribution in the current fiscal year, which was itself a $956.6 million increase from the prior year.

An agreement on what exactly should be done is lacking in the legislature, where the state Senate returns on Wednesday and the House on Jan. 6.

"There isn't one clear proposal that all of the leaders are focused on," said Rikeesha Phelon, spokeswoman for Senate President John Cullerton. "There are good ideas being presented, but they aren't all in one place."

A plan offered by some House lawmakers earlier this month, would boost worker contributions, raise retirement ages and limit cost-of-living increases for retirees with the aim of fully funding the pension system in 30 years. It would also gradually shift pension payments currently made by the state onto local school districts, universities and colleges.

The bill's sponsors said its passage would immediately cut the state's unfunded pension liability by 29 percent or $28 billion. The plan would also reduce annual state pension payments through fiscal 2045 by $169 billion, with the fiscal 2014 payment dropping to $4.8 billion from $6.7 billion, according to their actuarial analysis.

State Representative Daniel Biss, one of the sponsors, said he has been working to drum up support for the bill, which he said offers a more comprehensive solution for pensions versus another bill, backed by Cullerton, that is pending in the House.

While powerful House Speaker Michael Madigan supports Biss' bill, it is up to the measure's sponsors to gather the necessary votes for its passage, said Madigan's spokesman Steve Brown.

"The speaker has been working for several years and continues to work on plans to make the pension system sustainable," Brown said, adding that he cannot predict if any bill will ultimately make it out of the lame-duck session.

Complicating matters is opposition from the state's public worker labor unions, which are already threatening lengthy and costly lawsuits they are confident of winning given strong protections for public pension benefits in the Illinois Constitution.

Under Cullerton's alternative proposal, state employees and lawmakers would choose between keeping their 3 percent compounded cost-of-living adjusted pension increases and their access to the state's retiree health insurance. The bill would save Illinois more than $31 billion over 33 years, according to Cullerton's office.

While it only involves two state pension funds, some supporters consider the bill a template for dealing with the state's three other pension funds, including the biggest - Teachers' Retirement System - which accounts for the lion's share of Illinois' unfunded liability.

Illinois has skipped or skimped on pension payments for years, leaving it with the lowest funded ratio among states. That ratio fell to 39 percent at the end of fiscal 2012 from 43.3 percent, with both well below the 80 percent level considered healthy.

Unions have called for an iron clad guarantee that the state will make its actuarially required annual payments. The bill that surfaced in the House this month includes a provision allowing the pension funds to enforce those payments through the courts. (Reporting by Joanne von Alroth, Karen Pierog and David Bailey; Writing by Karen Pierog; Editing by Greg McCune)