CHICAGO — With Illinois’ credit rating in the balance, the General Assembly moves into the final day of its spring session Thursday with action still needed on a roughly $34 billion fiscal 2013 budget and pension reforms to help stabilize the state’s finances.

Before adjourning for the day late Wednesday, the House advanced various budget bills. The Senate previously passed its version of the budget, but there are differences in size and spending authorization so Senate concurrence is needed or the two sides must resolve their differences.

Legislation not passed by Thursday requires a three-fifths vote instead of a simple majority, making it harder for the Democratic majority in the General Assembly to pass bills and giving leverage to the Republican minority.

Pension reforms took center stage during a contentious day at the state capital Wednesday. The day ended with Democratic House Speaker Michael Madigan of Chicago reversing course and dropping a provision in a House Democratic-sponsored pension reform package to shift teacher pension payments now paid by the state over to school districts, public colleges, and universities.

Madigan’s move sets the stage for approval Thursday of other benefit cuts that would help rein in the state’s rising pension burden which threatens the state’s fiscal stability. The state is carrying $82.9 billion of unfunded liabilities, for a 43% funded ratio.

Madigan pushed his restructuring plan through committee Tuesday but it hit staunch Republican opposition over the teacher cost-shift. The dispute prompted two days of verbal sparring between Madigan and House Republican Leader Tom Cross of Oswego. The teacher cost shift being dropped from the bill would have been phased in beginning in 2014. Republicans opposed the change over concerns that it would force districts to raise property taxes or make classroom cuts.

Late Wednesday, Madigan told House members he was dropping the provision at the request of Democratic Gov. Pat Quinn and handing over sponsorship of the bill to Cross. It will be heard in committee Thursday morning. “I disagree with the governor, but he is the governor. This is his request,” Madigan said.

The teacher cost-shift savings were estimated at about $29 billion. Quinn’s decision to forgo the cost-shift marked an apparent change of heart. Early Wednesday, his budget director Jerry Stermer testified before a Senate committee in support of the House Democratic package that included the cost-shift.

“Your efforts today are going to be watched by people all over this country, certainly by other states, by the bond houses,” he said.

State budget spokeswoman Kelly Kraft said of Quinn’s reversal: “Our goal all along has been to stabilize and strengthen the pension systems to provide significant relief to taxpayers while ensuring the public employees who have faithfully contributed to the system receive secure pension benefits. This would still meet that goal as well as provide for 100% funding of the pension systems by 2043.”

Under pending Senate Bill 1673, employees will be offered two options. One offers them a lower cost-of-living adjustment in which increases would no longer be compounded annually. Instead they would be based on the original base pension payment upon retirement.

As incentive, employees who make the move to the new plan would retain access to a state-subsidized retiree health care plan and their raises would continue to count toward future pension benefits.

Employees who don’t make the change would lose access to the state’s retiree healthcare program. The COLA savings are estimated at between $66 billion and $89 billion depending in part on how many opt for the new program.

The bill now under consideration drops Quinn’s original proposal to raise the retirement age to 67 and increase employee payments by 3%. The bill also impacts both current employees and retirees while Quinn’s excluded retirees. Quinn’s original proposal also would have ended state healthcare payment subsidies for employees who don’t move to the new plan but would have still allowed them access to the healthcare program.

Quinn has pressed lawmakers to overhaul pensions and the Medicaid program, citing Standard & Poor’s warning that the state faces a downgrade without action. Standard & Poor’s rates the state A-plus 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.

It remains to be seen whether the scaled-backed pension changes will win over rating agency analysts and investors who demand extra yield on Illinois paper. Lawmakers earlier this week gave final approval to cuts and a cigarette tax increase that will offset $2.7 billion in Medicaid costs.

The unions have threatened to challenge the proposed reforms. The state constitution affords stringent legal protections of pension benefits, which cannot be “impaired” or “diminished.” While lawyers agree the protections apply without exception to accrued benefits, legal opinions differ as to whether those protections are extended to future, not-yet-earned benefits. The state’s retiree health care benefits are not constitutionally protected.

COLA changes have been upheld in states such as Minnesota that afford pensions contractual status. In the Minnesota case, the courts found that COLA formulas did not fall under those benefits that are protected.

Democrats believe by offering employees the option of moving to a new plan, the reforms will pass a legal challenge, but acknowledge that ultimately it will be the state Supreme Court with the final word.

The bill does not include Chicago Mayor Rahm Emanuel’s request to raise the retirement age, employee contribution rates, and suspend COLAs for 10 years for city employees. The city faces $15 billion of unfunded pension obligations. Moody’s recently revised its outlook on the city’s Aa3 general obligation rating to negative in large part because of the pension pressures.

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