CHICAGO – Illinois lawmakers adjourned their 2012 session early Friday after approving a major expansion of gambling, $1.6 billion in new borrowing for transportation and transit, and a $33.7 billion fiscal 2013 general fund budget, while political disputes derailed pension reform.

Lawmakers of both parties expressed disappointment over their failure to act on a pension restructuring and worried that it could result in a rating downgrade. The inaction dealt a blow to Gov. Pat Quinn who had named pension and Medicaid reforms as his top priorities and crucial to stabilizing state finances. Lawmakers did approve earlier in the week a $2.7 billion Medicaid restructuring.

“As I have repeatedly made clear, inaction on pension reform is not a choice. We must fundamentally reform our pension system and we must enact bold reform that eliminates the unfunded liability,” Quinn, a Democrat, said in a statement late Thursday.

The governor added that he expects to soon meet with the General Assembly’s Democratic majority and Republican minority leaders in an attempt to reach agreement on a package that likely would be the subject of a special session this summer. Passage could become more difficult as lawmakers head into election season amid union opposition to the pension cuts they labeled as unconstitutional and immoral.

The pension reform bill that surfaced this week came from House Democrats. It asked current and retired employees to voluntarily move to a new plan with reduced cost-of-living increases. Those who opted not to move would lose their subsidies and access to the state’s retiree healthcare program and their future raises would not count toward their pension benefit.

The plan also gradually shifted public teacher retirement payments now paid by the state to school districts, colleges, and universities. Currently, only Chicago Public School 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 House Speaker Michael Madigan, D-Chicago, to drop the provision. Madigan, in turn, handed sponsorship of Senate Bill 1673 over to House Minority Leader Tom Cross, R-Oswego.

The removal of the cost-shift angered Democrats and Madigan said Thursday he would vote against the revised bill. Unable to raise the Democratic votes needed, Quinn asked Cross to hold the bill.

The cost-of-living changes alone were estimated to trim between $66 billion and $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. The state is carrying $82.9 billion of unfunded liabilities, for a 43% funded ratio.

“Your efforts today are going to be watched by people all over this country, certainly by other states, by the bond houses,” state budget director Jerry Stermer told lawmakers this week.

Standard & Poor’s has warned that the state faces a downgrade without action. It rates the state A-plus rating with a negative outlook. Moody’s Investors Service rates the state’s GOs A2 with a stable outlook and Fitch Ratings assigns an A and stable outlook.

The approved budget cuts discretionary spending by $700 million with reductions hitting areas like education, universities, healthcare for the poor, and corrections, while increasing overall spending by about $400 million due to mandatory increases.

“Two years in a row, spending is going up,” said Republican state Sen. Matt Murphy of Palatine. “We are not closer to the fiscal responsibility needed.” Senate Republicans believe that billions in cuts are needed to avoid making permanent the temporary income tax hike approved last year.

Democrats counter that the slight increase still keeps state within self-imposed annual spending increases and that skyrocketing pension payments are driving the hike. The state will pay $5.2 billion into the pension system in fiscal 2013, up from $4.1 billion in the current fiscal year.

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 that begins July 1.

Lawmakers approved $1.6 billion in new general obligation borrowing for transit and transportation in House Bill 4568 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, the Senate in a 30-26 vote approved a gambling package that includes five new casino licenses including one for Chicago and allows slot machines at racetracks. The House had previously approved the bill. 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 said last week after the House passage of the bill that that he remains concerned about gambling oversight issues, so its fate is uncertain.

Sponsors of Senate Bill 1849 project that it could generate more than $1 billion in upfront licensing and tax payments and then between $300 million and $1 billion annually.

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