CHICAGO — Taking a major leap toward addressing the state’s pension crisis, the Illinois House passed a wide ranging reform package Thursday aimed at slashing the unfunded liabilities and reining in rising annual payments that are straining the state’s fiscal foundation.

It now heads to the Senate where its fate is uncertain.

The bill — sponsored by powerful House Speaker Michael Madigan, D-Chicago, cleared the House in a 62-51 vote with two present votes. “This is a critical action that must be taken now for future budget making and for the fiscal well-being and reputation of the state of Illinois,” Madigan said ahead of the vote.

Madigan earlier in the week unveiled the package that culls together a series of previously approved individual proposals and bills, some with bipartisan support, and expanded it to cover four of five state pension funds. The state is at the bottom of its counterparts in the health of its pension system, with unfunded pension obligations of $95 billion for a 40% funded ratio. Pension payments will rise by $900 million to $6 billion in the next budget, consuming 19% of the general fund.

The Madigan package lays out a series of direct cuts and other changes that run counter to a plan from Senate President John Cullerton, D-Chicago that includes a backup plan asking employees to voluntarily accept cuts and other changes in exchange for preserving subsidized retiree health care.

With momentum now building for a resolution, the House action either sets the stage for a grand bargain — needed to avert further state credit deterioration that would further drive up state interest rate penalties — or it could end in a whimper. Lawmakers appeared close in the past on a pension deal only to be derailed by political differences over a proposal to shift the cost of teachers’ pensions from the state to school districts. Madigan dropped that provision from his bill.

Gov. Pat Quinn praised the House action. “Today the Illinois House of Representatives took the biggest step to date towards restoring fiscal stability to Illinois,” he said in a statement. “Illinois is closer than ever to addressing a decades-long problem that is plaguing our economy, our bond rating and the future of our children. “

Madigan’s bill limits annual cost of living increases, raises the retirement age for those now under 45, caps pensionable salaries, phases in a 2% increase in employee contributions over two years and calls for the $1 billion that will be freed up in 2020 when existing pension notes are retired to be made as a supplemental payment to the pension systems above the regularly scheduled payment.

The bill puts the state on the path to fully fund the system in 30 years and payments would be set based on an actuarially required contribution level. If the state fails to make the ARC payment, unions can seek court enforcement. Pension changes no longer would be the subject of collective bargaining and use of pension funds to pay health care costs would be prohibited.

The bill also strengthens the pension payment commitment which is currently a continuing appropriation. It would be second only to debt service. The bill clearly spells out that the pension payment will remain subordinate to debt service. The bill also ties the COLA change to the funding guarantees because Madigan said the state cannot afford the guarantee if the courts throw out the COLA cut.

Supporters believe the Madigan bill would trim about $30 billion off the state’s unfunded liability and eventually about $1.8 billion off annual payments for overall savings over the 30-year schedule of $150 billion based on analysis done on past measures now included in the Madigan bill.

“This state is in crisis. What we are doing today is not an easy move but it’s a move that if we do not take we will fail and we will fail quickly and we will fail completely,” said Rep. Dwight Kay, a Republican.

Standard & Poor’s rates the state’s $27 billion of GOs A-minus and assigns a negative outlook, making it the lowest-rated state. Fitch assigns an A rating to the state’s $27 billion of GO debt and has the credit on negative watch. Moody’s rates Illinois GOs A2 with a negative outlook.

The rating agencies are following the pension reform efforts closely and several could act based on the results of the spring session. The state pays steep interest rate penalties to borrow and its fiscal woes also impact the borrowing rates and ratings of many local governments and the public universities.

Some House members Thursday pressed for further action, calling for the inclusion of the controversial Republican-opposed teacher cost-shift. Others said they wanted to see the funding guarantee even further strengthened and wanted the judges fund included in the package. Madigan called the package a “first step” and said additional measures such as the cost-shift would be forthcoming, but he portrayed his bill as the best shot of getting something through the General Assembly this session.

Madigan defended the decision to leave the judge’s fund out of the package as a means to avoid “a conflict of interest” given the expected legal challenge by unions. Madigan and other proponents believe the package will withstand a legal challenge.  The state constitution protects against diminishing or impairing pension benefits affording them contractual rights.

Madigan’s argument lies in large part on the position that the pension system is already impaired and the state will be unable to fund basis services and programs amid rapidly rising payments unless action is taken to bring solvency to the system.

“I believe the courts will not force use to put pension payments above all other priorities,” said Rep. Elaine Nekritz, a Democrat and Madigan’s point person on pension reforms.

Cullerton’s legal staff believes imposing direct cuts will not hold up in court and that employees must make the choice voluntarily with the incentive of preserving their retiree health care subsidies. Cullerton said union representatives had presented him with a viable pension reform plan that includes an employee choice and various proposals along with Madigan’s would be taken up next week.

Madigan’s bill lead with language that lays out a bleak picture of the state’s current predicament, its future insolvency without pension reform, and the devastating impact on citizens. The language lays the ground work for the state’s legal arguments should it be adopted and challenged by the unions.

“Illinois possesses a lower credit rating than each of the other 49 states. This is a consequence both of atypically large debts and of structural imbalances that will, unless addressed by the General Assembly, lead to rapidly growing debts,” it reads. The bill “constitutes the substantial reform of the state’s pension systems that, along with a series of further steps toward fiscal stabilization, will enable the state to credibly promise the full payment of all pension benefits without incurring unacceptable harm to other areas of State interest,” it continues.

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.