03/14/2013 06:24 pm ET Updated May 15, 2013

Illinois Pension Reform: House Takes Baby Steps To Rein In Costs

SPRINGFIELD, Ill., March 14 (Reuters) - The Illinois House of Representatives continued its piecemeal approach to reforming the state's sagging public pension system on Thursday, passing two measures that will save an amount equal to only a sliver of the state's unfunded pension liability.

The Democrat-controlled chamber passed bills that will increase retirement ages for certain workers and cap pensionable salaries.

Together over 30 years, they are expected to save the state $1 billion, according to Chris Maley, a spokesman for House Speaker Michael Madigan.

Illinois' unfunded pension liability stands at $96.8 billion.

"These are just parts of a pension program that we think has further to go," Maley said.

The House had passed a similar bill on capping pensionable salaries a week ago.

Illinois' pensions, the worst-funded among states, have been a crushing credit concern as worker retirement costs threaten funding for core services such as education, health care and public safety.

Inadequate disclosure by the state about years of inadequate pension funding led to federal civil securities fraud charges of misleading bond investors. Illinois settled the case with the U.S. Securities and Exchange Commission on Monday without admitting or denying the charges.

Credit rating agencies have been hammering Illinois' rating to the lowest level among states, and bond investors have been demanding higher yields to buy the state's debt.

The House bills, which now head to the Democrat-controlled Senate, would raise the retirement age for workers aged 45 or under and employed prior to Jan. 1, 2011, by one to five years, according to Maley.

Pensionable salaries for workers employed before Jan. 1, 2011, would be capped at the higher of the U.S. Social Security wage base, which is indexed to inflation, or the worker's salary at the time the bill takes effect, Maley said.

Meanwhile, a much bigger piece of the pension reform puzzle is headed to the House floor after being passed by the Personnel and Pensions Committee on Thursday.

Bill sponsors, including House Republican Leader Tom Cross, said the measure could save the state $160 billion.

"We believe this legislation offers both state workers and taxpayers alike the most comprehensive and reasonable pension solution available," Cross said in a statement.

The bill would limit cost-of-living adjustments to the first $25,000 of a retiree's pension and increase employee pension contributions by 2 percent over two years.

The measure, which includes a cap on pensionable salaries and higher retirement ages, would also put local school and higher education workers hired after Jan. 1, 2014, into defined benefit/defined contribution plans that would be the responsibility of school districts and public colleges and universities. Currently, Illinois pays pension costs for the Teachers' Retirement System and the State Universities Retirement System.

Proposals such as eliminating or capping cost-of-living adjustments for retirees, requiring higher pension contributions from workers, and shifting the responsibility for paying teacher pensions to local school districts from the state have been met with stiff opposition.

If pension reforms are enacted, labor unions have warned they are prepared to use the Illinois Constitution's strong protections for pension benefits to fight changes in court.