01/04/2013 04:17 pm ET Updated Mar 06, 2013

Illinois Pension Reform: Teacher Cost Shift Tabled, Governor Quinn Confident Of Passage

CHICAGO, Jan 4 (Reuters) - Illinois Governor Pat Quinn said on Friday he is optimistic that state lawmakers will pass pension reform legislation next week after a controversial but key component of the plan was dropped.

The Democratic governor said powerful House Speaker Michael Madigan told him he will defer a measure to gradually shift state payments for teacher pensions onto local school districts until a later date.

"That's a major, I think, step forward for all of us to put together a plan, a bipartisan plan, to do what the people of Illinois want," Quinn said after meeting with DuPage County officials.

Steve Brown, Madigan's spokesman, said legislative leaders will meet with the governor on Saturday "to fill in the elements of a bill."

Those elements will likely include higher contributions by state workers, cost-of-living adjustments, caps on salaries used to set pensions, the elimination of pension abuse and a guarantee the state will make required annual pension payments, according to a source familiar with pension discussions.

Illinois' finances are buckling under the weight of a huge $96 billion unfunded pension liability that is rapidly siphoning off money needed for essential state services such as healthcare and public safety. The lack of a pension fix has led to downgrades of Illinois' credit ratings, with Moody's Investors Service warning last month it could drop Illinois below the current A2 rating, the lowest among the states it rates.

The so-called cost shift of pension payments for the Teachers' Retirement System onto local districts helped derail the passage of reforms during the last days of the legislature's regular session, which ended May 31. Republican lawmakers were concerned the move would lead to local property tax hikes.

But the cost shift resurfaced in a House bill that some lawmakers have been pushing during the legislature's lame-duck session, which began on Wednesday and ends next Tuesday.

That bill aims to fully fund the pension system in 30 years by also boosting worker contributions, raising retirement ages and limiting cost-of-living increases for retirees.

Quinn said he was hopeful that a pension reform bill minus the cost shift will land on his desk by midnight on Tuesday, before the start of a new legislative session on Wednesday.

The governor and others who supported the cost shift have argued it was needed to ensure that school districts, which typically boost teachers' pay in years just prior to their retirement, take financial responsibility for the ensuing higher pensions.

It was also a key component because the teachers' system, which includes teachers in the state outside of the Chicago Public Schools, is the largest of the five state pension funds, accounting for the lion's share of the unfunded liability.