CHICAGO – Illinois Gov. Pat Quinn wants legislative action on a pension reform bill by July 9, giving a conference committee set up Wednesday three weeks to fashion a package that can bridge the impasse over two rival plans.
Quinn set the July 9th deadline after lawmakers took the procedural votes to form the committee during a special session Wednesday called by the governor to deal with the state’s pension crisis.
“This is an emergency and the taxpayers of Illinois are depending on the General Assembly to produce a real solution that erases our pension debt and supports economic growth,” Quinn said in a statement. “As I’ve repeatedly made clear, taxpayers cannot afford gridlock on this paramount issue.”
Lack of action is hurting taxpayers, the Illinois economy, and the state’s bond ratings, Quinn added.
Democratic leaders agreed to the conference committee proposal first floated by Quinn after it became clear in recent days that a political stalemate over two rival plans would not be breached by the Wednesday session.
After two years of failed attempts at reform, it’s unclear how the committee will end the impasse and the clock is now ticking on the July 9th date.
The committee – a rarity in Illinois -- will be made up of 10 members appointed by the General Assembly minority and majority leaders with Democrats holding a majority as they do in the General Assembly. “I think it would be a very good step in towards reaching a compromise on this very contentious issue,” Senate President John Cullerton, D-Chicago, said.
A plan produced by the committee would go before the full General Assembly as an amendment and lawmakers would reconvene the special session to consider it. A three-fifths majority is needed during a special session for legislation to take effect immediately. A simple majority would delay enactment.
The General Assembly’s failure in regular session to overhaul the pension system weighed down with $95 billion of unfunded liabilities for a funded ratio of just 40% drove downgrades in early June by Fitch Ratings and Moody’s Investors Service.
The Senate and House are deadlocked over plans sponsored by their leaders – Cullerton in the Senate and Speaker Michael Madigan, D-Chicago, in the House.
The House package saves more by imposing direct benefit cuts and raising employee contributions. It would trim an estimated $187 billion off total payments owed over the next three decades to bring the system to a fully funded level. It would also chop about $21 billion off the state’s unfunded obligations.
The Senate package asks employees to accept cuts in exchange for preserving their retiree healthcare subsidies. The plan would achieve $57 billion in savings to bring the system to a 90% funded ratio and cut unfunded liabilities by $9 billion.
The House plan failed in the Senate last month but the Senate plan was never called up for a vote in the House. While the House plan saves more, Senate critics believe it can’t withstand a legal challenge and cuts too deeply into promised benefits.
The Senate package was negotiated with the support of unions, but a legal challenge is still expected. The state constitution affords strong contractual rights to pension benefits which may not be impaired or diminished.
Cullerton believes his plan is constitutional because employees would be offered a choice to move to the new plan. Madigan supporters believe his plan could pass a legal test based on the argument that the state’s pension system is insolvent and the state faces dire fiscal consequences without cutting benefits.
The state next week will sell $1.3 billion of general obligation bonds. State debt manager John Sinsheimer said recently he has no intention of pulling the sale, even if investors demand steeper interest penalties due to the downgrades and pension inaction.
Illinois delayed a planned January GO deal after getting a Standard & Poor’s downgrade, and ultimately paid yield penalties when the $800 million GO sale priced in April on par with secondary market spreads in the 140 basis point range over the Municipal Market Data benchmark on a 10-year maturity. Spreads then tightened but have widened after this month’s Fitch and Moody’s downgrades.
Fitch lowered the state one notch to A-minus and assigned a negative outlook. Moody’s downgraded the rating on $27 billion of GOs one level to A3 and also assigned a negative outlook.
The state and its finance team are holding investor meetings ahead of the sale. Siebert Brandford Shank & Co. LLC, Stifel Nicolaus & Co. Inc., and Wells Fargo Securities are co-bookrunners. Peralta Garcia Solutions is financial adviser.
Standard & Poor’s rates Illinois A-minus with a negative outlook. Illinois is the lowest rated state by Standard & Poor’s and Moody’s, and Fitch rates it the same as California which has a positive outlook.
This week, Bill Daley, a former banker and a member of the Obama and Clinton’s administrations, jumped into the pension fray. Daley, the brother of retired Chicago Mayor Richard Daley, has announced he is exploring a run against Quinn next year.
Republican House Minority Leader Tom Cross voiced a theory that the stalemate between longtime allies Madigan and Cullerton was contrived to help Madigan’s daughter, Attorney General Lisa Madigan, should she enter the governor’s race. Action on reforms would represent an accomplishment Quinn could tout in his re-election campaign.
Daley derided Quinn’s leadership and his backing of various plans instead of settling on one. He also questioned why Quinn had not asked another potential challenger, Attorney General Madigan, to issue an opinion on the constitutionality of the various plans.
Madigan’s office would defend any pension legislation in a constitutional challenge.
Daley supports Speaker Madigan’s plan because of its greater savings. Quinn’s administration countered that he has pressed for comprehensive reforms for two years.
“The two most powerful guys in the state of Illinois can get anything done,” Cross said during a news conference, citing their successful effort to push through an income tax increase in 2011. Lawmakers close to both leaders have dismissed the theory and said their divergent paths over how to solve the pension are rooted in philosophical differences.
The state’s pension payment will rise by about $900 million to $6 billion in fiscal 2014, consuming about 17% of the state’s $35.3 billion general fund. The state will end the fiscal year with about $6 billion in unpaid bills and faces further strain with the partial expiration of the 2011 income tax increase in fiscal 2015.