Wednesday, March 24, 2010

Pension reform bill passes both chambers

By Jamey Dunn

A pension reform bill to create a two-tiered benefits system for state retirement systems moved swiftly and successfully through both legislative chambers today with bipartisan support, propelled partly by a potential threat to Illinois' bond rating.

David Vaught, Gov. Pat Quinn’s budget director, said he was concerned that Illinois’ bond rating, which determines the interest rate the state will have to pay on borrowed money, could be downgraded again when the state seeks to borrow about $1 billion in April to fund the capital construction plan.

Vaught said pension reform could help Illinois avoid a slip in its rating because it would show investors that the state is taking steps to address its structural deficit and “the straitjacket of skyrocketing pension costs.” The state’s total pension liability is $126.5, billion, $77.8 billion of which is unfunded.

Moody’s Investors Service downgraded the state’s bond rating in December to the second lowest in the nation, just above California.

The changes to the pension system would only apply to newly hired employees and would not affect the benefits of anyone currently working for state entities.

State employees hired after the bill takes effect would have to wait until age 67 to get full benefits. They could start receiving benefits at age 62 with a 6 percent reduction for each year they draw their pension before 67.

An alternative formula, which lets employees retire at 60 after working for 20 years, would be limited only to Department of Corrections security workers, Illinois state police officers and state firefighters.

Benefits would be determined by averaging the highest paid consecutive eight years in an employee’s career. They are currently determined by the highest consecutive four years of the last 10 years. The amount benefits can be based on would be capped at $106,800, the threshold for Social Security benefits.

Survivor benefits, which vary throughout the different systems, would be set at 66.7 percent of the employee’s annuities.

One part of the bill does apply to current and past employees. If they leave one state job and go to another, they would not be allowed to collect pension benefits while getting a paycheck from Illinois. They would be able to collect both pensions once they retire.

“The General Assembly tonight took an important and vital step toward rescuing Illinois from fiscal calamity by passing public pension reform. The legislation approved by the General Assembly will stabilize the public pension system, protect current state employees and provide attractive pension benefits to future state workers,” Quinn said in a written statement. The governor backed a two-tiered plan that stalled last session.

The bill also exempts Chicago Public Schools from “ramp-up” of payments for the next three years. House Speaker Mike Madigan, who sponsored the bill in the House, said the school district asked the legislators to allow it to make smaller payments into its own pension fund and will use the extra cash to plug holes in its operating budget.

House Republicans opposed that part of the measure. Danville Republican Bill Black said it would set the system up for an “Armageddon-type situation.”

“I would really like to vote for this bill, but there’s one thing that the pension task force made very clear, that the most important thing you can do in pension reform is, you have to make the payments,” Black said.

Will Lovett, a lobbyist for the Illinois Education Association, said that raising the retirement age could drive talented teachers to neighboring states.

Henry Bayer, executive director of Council 31 of the American Federation of State, County and Municipal Employees, said that shorting pension fund payments in the past to shift money to other areas of the budget has landed the state in a crisis.

“The problem of our pensions is not a problem of rich benefits. The problem of our pensions is that we have not funded them year in and year out,” he said. “The solution to the crisis is to come up with the revenue to pay the $80 billion we already owe.”

Senate President John Cullerton, the sponsor of the bill, agreed that underfunding of the pension system is a big part of the problem, but added, “We are where we are.”

The changes in the proposal would not apply to local firefighters and police officers. Sen. Terry Link, a Waukegan Democrat, and Sen. Pam Althoff, a McHenry Republican, are in negotiations with both groups.

“Hopefully, we will see step one of that when we return from break,” Althoff said.

The bill that passed today rolled in a measure, passed unanimously by the House last week, which makes changes to the retirement benefits of future Illinois judges and General Assembly members. The proposal also requires judges and lawmakers to wait until age 67 if they want to collect full benefits.

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