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Illinois pension liability issue on the brink of finally being resolved

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It has been decades in the making and has been talked about, studied and the target of ridicule in the past few years. But, on Wednesday of this week, as members of the Illinois Statehouse were preparing for their Thanksgiving Day activities at airports, in cars or at grocery stores, their cell phones started to blow-up with calls and e-mails. The reason is that on that afternoon, it was announced that the bi-partisan leadership of the Illinois General Assembly had come to agreement on how to fix the state’s $100 billion-plus pension liability problem.

This has been more than a problem. It has been an albatross hanging over the state’s finances that have led to reduced bond ratings, late payments to vendors and reductions in public services that continued to grow, at times exponentially. The plan, which was revealed with some detail today, is expected to go to both chambers for floor votes on Tuesday of next week. It may be tweaked a bit that day, but here is the framework:

• The plan would achieve 100 percent funding for the pension system by state fiscal year 2044;

• The State of Illinois would contribute $364 million in SFY 2019 and $1 billion through 2045;

• If the State of Illinois fails to make a pension payment or a supplemental contribution, affected retirement systems may file suit with the Illinois Supreme Court regarding the inaction;

• State workers would contribute 1% less of their salaries towards their pensions;

• There will be changes to when state workers can retire. For those 45 years of age or under, the retirement age will be increased on a graduated scale. For each year a member is under 46, the retirement age will be increased by 4 months (up to 5 years); and

• There would be cost of living allowance and pensionable salary caps;

• Some current workers would have the option of joining a defined contribution plan.

The benefits to tax payers are clear. It would place the state on much stronger fiscal footing and free up revenue for public services like education. Businesses in the state could feel more comfortable about knowing how state taxes will impact their costs of doing business. Vendors may become more inclined to bid on state projects knowing that will be paid in a reasonable amount of time.

There are some obstacles. It will more than likely be challenged in the courts by unions that represent current state workers and by groups of now-retired state workers. The key will be if a court determines if benefits have been diminished by the plan because the Illinois Constitution clearly states that members of State of Illinois pension/retirement systems cannot be diminished or impaired. Fiscal ratings agencies will be watching, but their reaction to the agreement if it is enacted should be swift.

If it happens, it will mark the end of a lot of fighting. The biggest obstacle has been that Illinois Speaker of the House Michael Madigan has gone on record that current state employee retirement benefits could be reduced and even if that was questionable, the fiscal plight of the state would trump that in the courts. But, Illinois Senate President John Cullerton has always contended that any diminishment would be clearly unconstitutional and any law that included that would not hold up in the courts. Cullerton believed that a swap or menu of benefit options would pass the constitutional test. It got so contentious that Governor Pat Quinn threatened to not sign any bills during the last legislative cycle if pension reform wasn’t dealt with and he even tried to withhold legislator’s pay until an agreement was reached.

Tuesday, December 3rd of the year 2013 may be one of the biggest days in the history of the Illinois Statehouse. But even if the pension reform agreement passes in both chambers and Governor Quinn signs it with no changes, everyone will not be happy – which is why it pretty much why it took so long to happen.



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