03/07/2013 06:26 pm ET Updated May 08, 2013

Illinois Pension Reform: House Votes To Cap Payments, Defeats More Sweeping Proposals

By Renita Young

SPRINGFIELD, Ill., March 7 (Reuters) - The Illinois House of Representatives on Thursday took the first small step of the year toward pension reform, voting to cap annual pensions to retired workers to end abuses resulting in payments exceeding $100,000 a year to some people.

But two more sweeping reforms were soundly defeated as lawmakers struggled to piece together a package to restore to financial health the nation's worst funded state pension systems.

After weeks of delay, debate and rejection of reforms to the nation's worst-funded state pension systems, the House voted 65 to 7 for the cap on pensions. It would put a ceiling on the salaries used to calculate pensions for retired state workers to what is called the Social Security wage base, now at $113,700, adjusted annually for inflation.

The move was a test vote called by powerful House Speaker Michael Madigan to gauge support for individual parts of pension reform. He hopes to use specific votes to determine which measures have enough support to be part of a comprehensive package.

Lawmakers rejected by a vote of 67 to 2 a proposal to freeze cost-of-living increases for retired workers for 10 years. Retired state workers now get automatic, compounded 3 percent benefit increases annually.

They also rejected a proposal, 47 to 11, that would require public sector workers to contribute 2 percent more toward the cost of their pensions, followed by another 2 percent the next year. Public sector unions have offered to increase their contribution by 2 percent but have not offered a second increase of 2 percent.

Minority Republicans boycotted the vote, as they did last week on other pension proposals, saying the process of considering the measure was a charade engineered by majority Democrats led by House Speaker Michael Madigan.

Supporters said the measure would save $632 million in fiscal year 2014 starting July 1, which is small compared with a system of state pensions that is $96.8 billion short of full funding. The Illinois system is 39 percent funded, compared with the 80 percent considered healthy.

The approval gave hope to some lawmakers that wider reforms can eventually be agreed to.

"I think it demonstrates that the process that we're going through, we don't have to be so cynical about it, it can get us to a solution," said Democratic Representative Elaine Nekritz, a leader in pushing for pension changes.

Illinois, with the lowest debt rating among the states analyzed by major agencies Moody's Investors Service and Standard & Poor's, faces a fiscal crisis. The state budget has been balanced only by putting off the payment of some $9.3 billion in bills to vendors with the state as of the end of 2012.

The cost of annual payments to the pension systems for state and local government workers has ballooned to a projected $6 billion in 2014, consuming nearly one of every five dollars of the operating budget.

Illinois legislators have been unable to pass reforms, in part because public sector unions are major political and financial backers of the ruling Democratic Party. Democrats have a supermajority in the legislature but there have been some efforts to work on a bipartisan solution.

Last week, the Illinois House soundly rejected harsh pension measures proposed by Madigan that would have eliminated annual cost of living increases for retired workers, increased the retirement age to 67 and forced workers to contribute 5 percent more to the cost of their pensions.

Democratic Governor Pat Quinn, during his annual budget speech on Wednesday, pleaded with the legislature to act quickly on pension reform.