CHICAGO – Pension reform proposals advanced in the Illinois General Assembly this week ahead of a spring recess, offering signs of progress while also raising questions over the prospects for a major overhaul that could spare the state further rating downgrades.

The Illinois House on Thursday passed in a 66-50 bipartisan vote legislation that limits cost-of-living adjustments. The measure, sponsored by Democratic House Speaker Michael Madigan, would impact four of the state’s five pension funds that cover current and retired state employees, teachers outside of Chicago, lawmakers, and university employees.

COLA increases are considered a primary driver of the state’s growing unfunded state obligations that stand at $95 billion, and the measure is projected to save the state $100 billion in future payments.

The COLA change is the latest in a series of specific measures, including a hike in the retirement age and a pension cap, that were stripped out of a sweeping legislative pension reform package and approved in separate votes by House members. Madigan suggested that the votes are laying the groundwork for an overall plan that can win the chamber’s support.

“If we pass this bill and we all recognize the COLA is the big cost driver and the problem, then I think we’re in a position to finalize preparation of the bill and move a bill from the House to the Senate that includes all aspects of the problem,” Madigan told lawmakers.

Some House members who oppose the measure raised concerns over whether it could withstand the expected constitutional challenge by unions on grounds that it violates rules prohibiting the diminishment or impairment of pension benefits.

The COLA change now heads to the Senate where its fate is uncertain given that chamber’s rejection a day earlier of a comprehensive reform package known as Senate Bill 35 that included a similar COLA cut. The change, along with other cuts and increased employee contributions, was projected to save the state $150 billion in future pension payments.

The Senate instead, in a 30-22 vote, adopted a bill sponsored by Democratic Senate President John Cullerton that impacts current teachers only. It asks them to shift to a plan that cuts their COLA in exchange for preserving their access to subsidized healthcare in retirement. Cullerton also intends to seek action on bills asking other unions to make similar shifts.

Cullerton stripped the teacher proposal out of his more expansive Senate Bill 1, which lays out two sweeping reform packages. The first embraces many of the measures making their way through the House such as caps on pensionable salary, a temporary suspension and reduction in COLAs, and higher employee contributions.

It also includes a Plan B backup that asks employees to voluntarily elect to accept the benefit and contribution changes in exchange for maintaining their subsidized retiree health care benefits. Plan B would only take effect if Plan A is ruled unconstitutional.

Cullerton has long taken the position that direct cuts won’t pass constitutional muster and employees must voluntarily make the shift. Supporters of the direct cuts in Plan A – which result in significantly more cost savings – believe the package stands a better chance on its own because the courts may be more inclined to overturn Plan A with an alternative backup in place. The Senate’s minority Republicans oppose the piecemeal approach in passing pension reforms.

Some lawmakers portrayed the latest votes as evidence that long-stalled reforms are advancing and the General Assembly is zeroing in on the issue. Others expressed concerns about the divisions that remain between the chambers and between Democrats and Republicans and whether they can be bridged on a piece of legislation that can make it to Gov. Pat Quinn’s desk.

Quinn cast the votes in a positive light in a statement Thursday while pressing lawmakers to continue their work.

“I’m encouraged by the positive steps recently taken by the Illinois General Assembly toward comprehensive pension reform,” he said. “There’s much more work to do, but I’m pleased to see progress being made.”

Rating agencies have warned that without action to rein in escalating pension payments and trim unfunded obligations, the state’s credit faces further deterioration.

Standard & Poor’s rates Illinois’ $26 billion of GO debt A-minus with a negative outlook. Fitch Ratings has the state’s A rating on negative watch. Moody’s Investors Service assigns a negative outlook to Illinois’ A2 rating. The state’s paper was trading last week at about 140 basis points over the Municipal Market Data benchmark on 10-year maturities. The state’s next debt issue is an $800 million general obligation deal selling competitively on April 2.

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