CHICAGO — Warning that the state’s credit rating hangs in the balance, Illinois Gov. Pat Quinn plans to meet with legislative leaders this week to take another shot at pension reforms after a reform package collapsed in the 11th hour of the General Assembly session Thursday.
Quinn’s goal is to resolve differences between Democrats and Republicans and pass reforms that wipe out $82.9 billion of unfunded liabilities over the next three decades on a payment schedule the state can afford. If an agreement is reached, he likely would call a special session in the coming weeks.
“The rating agencies are poised to decide upon our work and we must get the work done and get to the mountaintop,” Quinn said Friday. “It’s important for our credit rating. It’s important for our jobs … we must resolve and reform the pension system … we have little time to spare.”
Rising pension payments — which will grow by $1.1 billion to $5.2 billion in fiscal 2013 — for the unfunded liabilities consume most new state revenue growth. Quinn said that puts a “squeeze” on available funding for education, health care and public safety.
Earlier this year, the governor named pension and Medicaid reforms as his top legislative priorities and crucial to stabilizing state finances. Lawmakers did approve a $2.7 billion Medicaid restructuring.
“I think we are very close but we are not there yet … this is going to be my sole focus,” Quinn said of pension legislation.
Lawmakers adjourned their 2012 session late last week after approving a major expansion of gambling, $1.6 billion in new borrowing for transportation, and a $33.7 billion general fund budget.
Lawmakers from both parties expressed disappointment over their failure to act on pensions and worried over the impact on the state’s credit rating. Quinn is a Democrat and his party holds a majority in the General Assembly.
“This absolutely has to be done,” said Senate Republican Minority Leader Christine Radogno of Lemont. She added that “it would be a darn shame” if the state had to pay hundreds of millions more to borrow because “we can’t get the pension situation under control.”
Standard & Poor’s has warned that Illinois faces a downgrade without action on central issues like pensions, Medicaid and unpaid bills. It rates the state A-plus with a negative outlook. Moody’s Investors Service rates the state A2 with a stable outlook and Fitch Ratings assigns an A and stable outlook. Investors have demanded a steep interest rate penalty from the state due to its liquidity and budget struggles. The state’s pension system is now funded at a dismal 43%.
Democratic House Speaker Michael Madigan addressed House members, calling the session “productive” with time running out on pensions. “We are all very disappointed that we did not resolve the pension question,” he said.
Madigan backed a pension reform bill that asked current and retired employees to voluntarily move to a new plan with reduced cost-of-living increases in order for raises to continue being counted in retirement calculations and preserve their access to the state’s retiree health care program. The plan also gradually shifted public teacher retirement payments now paid by the state to school districts, colleges and universities. Currently, only Chicago Public Schools is responsible for the public share of teacher payments.
The cost shift to schools ran afoul of Republicans and Quinn reversed course on Wednesday and asked Madigan to drop the provision. Madigan, in turn, handed sponsorship of SB 1673 over to House Minority Leader Tom Cross, R-Oswego.
The removal of the cost shift angered Democrats. After Madigan announced Thursday he would vote against the revised bill, House Democrats began abandoning it. Unable to raise the votes needed, Quinn asked Cross to hold it.
The cost-of-living changes alone were estimated to trim between $66 billion to $88 billion off state payments into the retirement system with full funding achieved in 30 years. The teacher cost-shift savings were estimated at between $20 billion and $29 billion.
Quinn said Friday he had hoped to simply “defer” the cost shift issue to get the less controversial COLA changes passed and “make clear to the rating agencies” that the state was serious about reining in costs. He still supports the cost shift.
With the regular session over, any legislative action now requires a three-fifths majority. Lawmakers are also headed into election season and unions have blasted the proposed pension reforms as unconstitutional and immoral.
The state constitution protects against impairing or diminishing benefits. State officials believe the proposed reforms would pass muster because employees would voluntarily move to the new plan, but they acknowledge that the Illinois Supreme Court likely will have the final word.
The approved budget cuts discretionary spending by $700 million with reductions hitting areas like education, universities, health care for the poor, and corrections, while increasing overall spending by about $400 million due to mandatory increases.
Senate Republicans believe that billions in cuts are needed to avoid making permanent the temporary income tax hike approved last year. Democrats counter that skyrocketing pension payments are driving the increase and they stress that the spending levels remain within self-imposed limits on annual increases.
The budget also includes about $1.3 billion to pay down the state’s backlog of unpaid bills. The state comptroller has estimated that Illinois will carry between $8 billion and $9 billion of unpaid obligations into the new fiscal year July 1.
Lawmakers approved $1.6 billion in new GO borrowing for transit and transportation to help support the ongoing $31 billion capital budget. That figure fell short of the $2.4 billion requested by the Department of Transportation.
Late Thursday, lawmakers signed off on a gambling package that includes five new casino licenses, including one for Chicago, and allows slots at racetracks. State Senate President John Cullerton, D-Chicago, said he expects to send the package to the governor. Lawmakers last year passed a larger version but Cullerton never sent it to Quinn’s desk where it faced a veto.
Quinn hedged on Friday when asked whether he would sign the bill. “I believe in a strong ethical framework,” he said, suggesting the bill falls short.
The Medicaid restructuring marked a high point for the session toward the goal of shoring up state finances. Lawmakers approved $1.6 billion in cuts and passed a $1 per pack cigarette tax increase that is expected to raise $350 million and leverage another $350 million in federal funds. Changes to the state’s hospital assessment program will raise another $100 million and other spending shifts complete the $2.7 billion in savings.
Lawmakers also adopted major changes to retiree health care that will affect $33.3 billion of other post-employment unfunded liabilities. At least $250 million of annual savings are anticipated. The state’s OPEB payment for retiree health care next year is $877 million. The state will no longer subsidize future retirees’ premiums based on a current formula of 5% per year of service. Instead, the subsidy will be based on a sliding scale that takes into account length of service and ability to pay.
As part of the overall Medicaid package, lawmakers Thursday approved phasing out the state’s ability to push Medicaid bills into the next fiscal year by fiscal 2015.
The Medicaid package also establishes charity care standards for determining how much charity care the state’s nonprofit hospitals must dole out to maintain their tax-exempt benefits and what activities are counted toward that threshold.