CHICAGO — Illinois Gov. Pat Quinn yesterday signed legislation that cuts retirement benefits for future employees to help rein in the state’s growing unfunded pension liabilities, a measure he hopes lays the groundwork for legislative approval of a controversial income tax increase.

Quinn praised the Senate’s Democratic leadership and members “for their bipartisan support and for helping to bring in a new era of greater fiscal responsibility and accountability to Illinois” during a signing ceremony on the legislation approved late last month.

The governor is pressing lawmakers to act on his proposal to impose a temporary 1% income tax surcharge in the coming weeks, before their early May adjournment date. He is pushing the increase to stave off education cuts as the state faces a $13 billion deficit and liquidity crisis with $4.5 billion in unpaid bills.

Quinn said he is in discussions with legislative leaders and he believes his signing of the pension reforms and legislation that provides tax credits to promote job creation among small businesses could help win over lawmakers as part of an overall plan to help improve the state’s economy and finances.

The proposed $52 billion fiscal 2011 budget includes $2.4 billion in cuts and $4.7 billion in some form of deficit borrowing that could include tax-exempt issuance, while leaving nearly $6 billion of unpaid bills. The temporary 1% income tax hike could generate up to $3 billion that would help reduce the amount of unpaid bills and restore $1.3 billion in education cuts.

The pension reforms in SB 1946 should help whittle down the deficit a bit, by at least $300 million and possible as much as $1 billion. Over the long term, the reforms are expected to shave an estimated $100 billion off contributions needed to bring the state’s pension system to at least a 90% funded ratio by a deadline of 2045 set in prior legislation.

The state closed fiscal 2009 with a $62.4 billion unfunded liability in its four retirement funds, for a 51% funded ratio that is considered the worst in the nation among states.

All three rating agencies cite the size of the unfunded liabilities and the strain of growing payments on the state’s balance sheet as a negative in their assessment of the state’s creditworthiness. However, they say it’s a contributing factor and not the driving force behind recent negative rating actions.

Under the legislation, the state will shift to a two-tiered system with benefits reduced for future employees. The measure requires future employees to be at least 67 years old with 10 years of state employment to qualify for full benefits, and it caps the salary at which benefits are determined. It requires the highest average salary to be determined by reviewing a longer period, and employees would no longer be able to draw pension from one system if working in a full-time job covered by another system.

Groups like the Civic Committee of the Commercial Club of Chicago and the Chicago Civic Federation believe the reforms don’t go far enough, and the committee has warned that the pension funds could be insolvent in another 10 to 14 years.

Fitch Ratings recently downgraded the state’s $23.4 billion of GO bonds to A-minus and left the rating on negative watch as it awaits the results of the current legislative session and whether lawmakers will turn to one-time measures or enact more lasting solutions to the budget problems. Standard & Poor’s affirmed its A-plus, but placed it on negative watch. Moody’s Investors Service affirmed its A2 rating and negative outlook.

Illinois earlier this month sold $250 million of GO notes to raise funding for Medicaid and cash-flow purposes and $356 million of GOs for the state’s $31 billion capital budget. Another $700 million of taxable GO Build America Bonds will be sold next week with William Blair & Co. as senior manager.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.