CHICAGO — With labor union backing, the Illinois Senate will vote Thursday on a pension reform package that attempts to tackle the state's pension funding crisis by asking workers to accept benefit cuts in exchange for preserving their retiree healthcare subsidies.
The vote on Senate Bill 2404 in committee Wednesday and then on the floor Thursday comes one week after the House passed its own plan sponsored by Democratic House Speaker Michael Madigan that imposes cuts directly. It sets the stage for either a grand compromise between the chambers or a stalemate.
The Senate plan from Democratic Senate President John Cullerton would cut an estimated $46 billion of state payments to bring the system to a 90% funded level over the next 30 years. The exact savings are difficult to gauge because it's unknown how many workers will shift plans. It would trim about $10 billion off of the state's $95 billion of unfunded liabilities. It would shave $845 million off the state's scheduled $6 billion payment owed in fiscal 2014, Cullerton said.
The House plan would make a significantly bigger dent in future pension payments, trimming them by an estimated $140 billion to reach full funding in 30 years. It would eliminate $30 billion of the state's unfunded liabilities.
Supporters of the House plan favor it for the higher savings they argue are needed to address the state's pension woes.
Cullerton promoted his plan — supported by key unions — as the state's best bet to survive a potential legal challenge, given contractual rights that ban impairing or diminishing pension benefits. Unions called the House package unconstitutional.
"This plan is the best chance for the General Assembly to pass a clearly constitutional proposal that will save money and avoid an expensive and lengthy court battle," Cullerton said. "We must calculate the risk associated with passing a plan that could save zero if the court throws it out. We need to remember that the unilateral approach is a gamble. Betting against the constitution is risky."
Gov. Pat Quinn last week praised the Madigan plan. He has not yet weighed in on the new Cullerton package.
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. Rating agencies have warned the state that it faces further credit deterioration without action this spring.
Cullerton unveiled his plan late Monday after wrapping up negotiations with labor unions. The agreement does not preclude individual retiree or worker lawsuits. The Democratic caucus is behind the plan, Cullerton said.
Under the Senate package, workers would be offered three choices. They could move from the current plan with a 3% compounded cost of living adjustment to a 3% simple COLA with a two-year delay. All future salary increases would count toward their pension. That choice enables employees to maintain their retiree healthcare subsidies. An optional cash balance is also offered.
A second option calls for maintaining the current COLA but agreeing to a three year delay in it taking effect. Those employees would pay 2% more into the system and maintain retiree healthcare subsidies and future increases would count toward their pension calculation. The third option leaves the current COLA intact, but future salary increases would not count toward pensions and employees would not have guaranteed access to healthcare subsidies.
Options for current retirees and those about to retire are slightly different under the bill, which maintains the funding schedule put in place in 1995 with the expectation that annual payments would decline once the changes are actuarially incorporated into the schedule.
The package also bans mandatory bargaining over benefit changes and employee contribution increases and provides a stronger pension funding guarantee that requires the state to meet its obligations. It would apply to four of the five state unions as would the plan passed by the House. Both plans leave out the judges' fund over concerns of a conflict of interest in litigation.
A coalition of unions known as "We Are One" issued a summary highlighting the pension funding guarantee, the dedication of supplemental revenues, and the ability to choose.
"The union coalition has made a great effort to ensure fairness for the public employees and retirees who did not cause this problem, to ensure the stability of the pension systems for future generations, and to offer a credible way forward," Michael Carrigan, president of the Illinois AFL-CIO, said in a statement. This agreement is our coalition's bottom line."
Madigan's bill limits annual cost of living increases, raises the retirement age for those now under 45, caps pensionable salaries, and phases in a 2% increase in employee contributions over two years. It 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.
Madigan believes his plan would withstand a constitutional challenge based 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. A long preamble is attached to his bill underscoring the state's dire fiscal position amid rising pension payments and the insolvency of the current system.