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Illinois Vote on Legislative Leaders' Pension Overhaul Set for Tuesday

CHICAGO — Illinois lawmakers convene Tuesday to vote on a package of pension reforms agreed to by their leaders with the aim of stabilizing a system saddled with $100 billion of unfunded obligations.

The legislation, which was only just released in draft form Sunday, will receive its first vetting early Tuesday during a hearing of the conference committee assembled in June to craft a new reform package. The House and Senate will meet later on Tuesday to cast their votes on the package settled on by the General Assembly's leaders just last Wednesday.

The plan is estimated to trim $160 billion off state payments owed to the system with the goal of reaching full funding status in 30 years primarily by cutting benefits.

Backers believe the plan is the state's best shot yet at stabilizing a system that is just 39.3% funded because it has, for the first time, the support of both the House and Senate majority and minority leaders.

While the leaders worked through the holiday weekend to sway their members, unions said they would be meeting with select lawmakers Monday to urge a no vote and they plan a legal challenge if the bill is adopted.

Gov. Pat Quinn, who has been clamoring for lawmakers to pass reforms and over the summer attempted to halt legislative pay as a means to press the point, endorsed the plan. "When I proposed the creation of a conference committee in June, I asked members to draft a plan that eliminated the unfunded pension debt and fully stabilized the systems, and this plan meets that standard," Quinn said in a statement.

The state's pension woes and a two-year political impasse over how to overhaul the system have driven the state's credit deterioration, with its ratings now the weakest among states at the low-single-A level. Rising annual payments are blamed for crowding out spending on education, public health and safety.

In addition to tarnishing its own reputation with investors, the state's credit struggles have driven up the costs of borrowing for most Illinois-based issuers, especially those dependent on the state for aid like its public universities. It's called by market participants the "Illinois penalty" or "Illinois effect."

After two years of false starts on various pension reform proposals, the new plan is advancing rapidly. The General Assembly's Democratic majority leaders and minority leaders announced a tentative agreement Wednesday and then released a general outline Friday.

The plan is estimated to trim the state's contributions by up to $1.5 billion in the first year of the funding schedule.

The fact sheet outlines a change in how cost-of-living adjustments are assessed. Retirees would continue to collect the current 3% compounded annual COLA on only a portion of their annuities based on their years of service with the remainder tied to the consumer price index. The change would have a greater impact for retirees that receive larger pensions. Additionally, current employees will miss some annual adjustments depending on their age. For example, employees 50 or over will miss one adjustment while those 43 and under will miss five.

The legislation would also cap pensionable salary and raise the retirement age for those under 45 years. The retirement age will be increased on a graduated scale up to five years based on current age.

The state will shed its current statutory funding formula and contributions would be set by applying an entry age normal actuarial cost method, or EAN, which averages costs evenly over the pensioner's employment. The funding schedule would be designed to achieve a 100% funded ratio no later than fiscal 2044.

The plan also calls for supplemental state contributions in addition to the regular schedule. They include $364 million in fiscal 2019 and then $1 billion annually through 2045 or until the system reaches 100% funding. Additionally, the state will take 10% of the annual savings expected from adoption of the pension reforms and pump them into the pension system beginning in fiscal 2016 until the system reaches 100% funding.

The state's scheduled payments and supplemental contributions would be "guaranteed" and the retirement funds could ask the Illinois Supreme Court to compel the state to make the payments in the event lawmakers attempt to cut them. Past pension holidays are considered one the key causes of the state's pension mess.

In a measure pushed by Republicans, employees could opt for a defined contribution plan like the 401(k) style offered by many private sector employers. The overhaul would limit the number of employees that could make the shift.

Employees would contribute 1% less of their salaries than they do now under the plan. Backers of the plan may be banking on the cut to help convince the courts the plan offers employees "consideration" for reduced benefits and doesn't run afoul of strict state constitutional protections afforded pension benefits.

The constitution gives pension benefits contractual status and protects them from impairment or diminishment. "We've expected there would be a court challenge from the very beginning," House Speaker Michael Madigan, D-Chicago, said. "Built into this bill are several items of consideration" including the cut in employee contributions and funding guarantees.

A coalition of unions known as We Are One Illinois issued a stinging statement. "Unions representing hundreds of thousands of public employees and retirees were not included in the leaders' talks. If their new plan is in line with what's been reported from earlier discussions, then it's an unfair, unconstitutional scheme that undermines retirement security," the statement read.

The plan has other critics, including one of Quinn's Republican opponents in the 2014 governor's race. Some policy groups complain the reforms don't go far enough. Some lawmakers and others have also questioned the speed with which the leaders are whisking the plan through the legislature.

With the 2014 state elections coming up, the General Assembly's leaders have acknowledged the package faces a tough vote. But each stresses the bipartisan support behind the plan. "Having the leaders, all four agree, is a huge step in the right direction," Senate Republican Minority Leader Christine Radogno of Lemont said.

Madigan and Senate President John Cullerton, D-Chicago, had butted heads until recently over how to reform the system with each pursuing different avenues. Cullerton had pressed for a plan that would save $57 billion by asking employees to voluntarily accept cuts in exchange for preserving their retiree healthcare subsidies. He believed direct cuts would not withstand a constitutional challenge. Madigan had pushed a plan with direct cuts that would save $187 billion, believing it could clear the courts on the argument that without change the system was insolvent.

Currently, state contributions are estimated at $6.9 billion in fiscal 2015, up from $6.8 billion in fiscal 2014, and $5.9 billion in 2013. Already the lowest rated state, Illinois also carries negative outlooks from Fitch Ratings, Moody's Investors Service, and Standard & Poor's.

Municipal Market Data said last week Illinois has the widest state GO spread to the MMD benchmark of any state. In trades last week, a bond maturing in 2025 traded at a 175-basis-point spread while longer bonds traded at spreads of up to 152 basis points.

The changes would affect four of the state's five pension funds, including those that cover teachers, lawmakers, state police, and general employees. The judges' fund would initially be left out to avoid a conflict of interest for judges who will decide the constitutionality of the alterations , leaders said. If upheld, the changes probably would then be applied to the judges' fund.

If the plan passes Tuesday, supporters believe it could lay the groundwork for reforms to local government pension systems. Chicago has $19.5 billion of unfunded obligations, two of its four funds are headed toward insolvency, and a $600 million contribution spike to fund the other two is looming in 2015. Chicago , too , has seen its credit rating drop precipitously.

Mayor Rahm Emanuel said in a statement late last week: "Fixing the state pension issue is critical for Chicago's future and I will be working actively on behalf of the legislation…Nevertheless, it is critical to remember that Illinois' pension crisis will not truly be solved until relief is brought to Chicago and all of the other local governments across our state that now stand on the brink of a fiscal cliff because of our pension liabilities." Chicago 10-year GOs were trading at a spread of more than 200 basis points.

A copy of the draft bill was posted on the web site capitolfax.com.

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