Illinois legislative leaders strike deal on pensions

Michael Madigan, speaker of the Illinois Representatives, listens to the State of the State address in the House Chambers of the Illinois State Capitol in Springfield, Illinois February 1, 2012. REUTERS/Sarah Conard

CHICAGO (Reuters) - Illinois legislative leaders on Wednesday reached a long-elusive deal to reform the state's woefully underfunded public pensions, but the plan must still win support of lawmakers and could face legal challenges if approved. Powerful House Speaker Michael Madigan told reporters the plan would save the state more than $160 billion over 30 years. The plan raises the retirement age and reduces automatic increases in pension payments, according to a legislative source with detailed knowledge of the plan. It also gives state employees alternative options for retirement income, while also creating ways to block any future efforts at under-funding pensions by going to court to stop them. Under the deal, the retirement age for workers who are currently aged 45 and under would gradually increase. And for high wage earners, the state would set a cap on the portion of their salaries used to calculate pension benefits, according to the legislative source. The current 3 percent annual cost-of-living adjustment (COLA) for retirement pay would be subjected to a formula aimed at benefiting longer-term, lower earning workers. Increases would be tied to the inflation rate, the source said, but added that COLAs would be suspended for anywhere from one to five years, depending on the age of the worker. In return, workers would see a 1 percent decrease in their required pension contributions. Workers looking for an alternative to state-funded pensions would have the option of contributing toward a 401(k)-like investment vehicle. The plan also takes measures to protect the health of the state's pension system, the legislative source said. Illinois state-employee pension funds would have a right to go to court to force the state to make its required pension payments, according to the source. Money that had been set aside to pay off outstanding pension bonds would be put directly into pension payments starting in 2019. Steve Brown, Madigan's spokesman, said details would be released first to members on Friday and then to the public ahead of a legislative session on pension reform scheduled for next Tuesday. Shortly after the deal was announced it was slammed by Illinois' public labor unions, which said they were excluded from negotiations over pension changes by the state's four legislative leaders. "If their new plan is in line with what's been reported from earlier discussions, then it's an unfair, unconstitutional scheme that undermines retirement security," a statement from a union coalition said. Previous versions of pension reform have involved imposing limits on cost-of-living increases, changing retirement ages, and adjustments in the amount workers pay toward their pensions. Any pension reform plan likely will face a court challenge based on claims that a diminishment of pension benefits violates the state constitution. Governor Pat Quinn, who has been urging the Democrat-controlled legislature to tackle the state's $100 billion unfunded pension liability, applauded leaders "for their hard work to reach this critical agreement." Chicago Mayor Rahm Emanuel, whose city is facing its own looming pension funding crisis, cautioned that Illinois' pension problem will not be truly solved until the Legislature also approves changes to ease the funding burden on local governments in the state. Patty Schuh, spokeswoman for Senate Republican leader Christine Radogno, said the legislative leaders' agreement incorporates "comprehensive" pension reform. The Senate will join the House in holding a session on Tuesday to take up a pension measure, according to Ron Holmes, a spokesman for Senate President John Cullerton. Madigan put House members on notice on Monday that they will be meeting for a one-day session. "The Senate president will be debriefing members of his caucus in the coming days in hopes of garnering support," Holmes said. Illinois has the worst-funded public employee pension system among the 50 states. Pension costs are squeezing out funding for core services such as education, and Illinois has been punished by credit rating agencies with downgrades that have left it with the lowest credit ratings among U.S. states. Far-reaching changes to Illinois retirement benefits have been a hard sell in the Senate, where many members are wary of violating state constitutional protections for public employee pensions. Labor unions have pushed back against any effort to impose cuts to pension benefits, although they supported a Senate bill last spring that would have given workers and retirees a choice in how benefits might be cut. The state's House and Senate have backed competing proposals, with the House plan taking a more aggressive approach to cost reductions. Legislative leaders have been seeking ways to boost a projected 30-year savings over the $138 billion level eyed by a special legislative panel on pensions created in June. Negotiations have centered on savings that could be achieved through changes to the current 3 percent compounded cost-of-living adjustments for retirees. One proposal would limit such adjustments to half the annual inflation rate, with some compounding of payment increases. (Reporting by Karen Pierog; Editing by David Greising, James Dalgleish, Leslie Adler and Ken Wills)