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Key details of decision over Ill. pension crisis

Caption
(AP file photo)
Service Employees International Union members rally in the capitol rotunda before a May 8 Senate hearing on pension legislation at the Capitol in Springfield.

SPRINGFIELD – After years of inaction, Illinois lawmakers have approved a historic plan to finally close the gap on the state's $100 billion public pension shortfall, which is considered the nation's worst.

The House voted 62-53 in favor, minutes after the more union-friendly Senate approved the measure 30-24. The plan now will be sent to Gov. Pat Quinn, who has championed pension reform and has promised to sign it. The plan was unveiled last week by Democratic and Republican leaders in both the House and Senate, who said it will save the state $160 billion over 30 years, largely by cutting retirement benefits for state employees.

Union officials are expected to quickly challenge the plan's constitutionality, saying it unfairly hurts retirees who were promised a certain pension and worked hard to earn it.

Here are key details:

THE PREDICAMENT

Illinois' five public-employee retirement systems are a combined $100 billion short of what's needed to pay benefits as promised to workers and retirees. The accounts contain about 40 percent of what they need to be considered fully funded. The shortfall is due largely to decades of legislators skipping or shorting the state's pension payments – a practice that allowed them to spend that money elsewhere. Other causes include economic downturns, lower-than-projected market performance and beneficiaries living longer.

THE IMPACT

The massive unfunded pension liability – along with the state's other financial woes – has led credit rating agencies to repeatedly downgrade Illinois' rating to the lowest of any state. That means when the state borrows money, taxpayers pay more in interest than people in other states. Illinois' annual payments to the funds have grown, taking up about one-fifth of the state's general funds budget – about $6 billion – this year. That's money that could be going to schools, roads or other areas.

THE PROPOSED SOLUTION

Legislative leaders say the approved plan will reduce the unfunded liability by about $21 billion and fully fund the retirement systems by 2044. Among other provisions, it will:

• Raise the retirement age for people 45 and younger, on a sliding scale basis.

• Guarantee the state will make its full annual contribution to the funds and allow the systems to sue if the payments aren't made.

• Change the cost-of-living increase from the current rate of 3 percent, compounded annually, on the full annuity benefit. Retirees would receive increases at that rate only up to a certain amount of annuity benefit. Legislative leaders say the new structure would benefit lower-income workers who held their jobs longer. Employees also would miss some annual cost-of-living adjustments, depending on their age.

• Cap the amount of salary on which a pension benefit is based. In 2013, that amount would be about $110,000.

• Decrease the employees' own contribution to their retirement funds by 1 percent.

• Provide workers the option of participating in a 401(k)-style defined contribution plan.

THE NEXT STEP

Unions say they will sue. They argue the proposal would violate a provision of the state Constitution that prohibits diminishing pension benefits. Legislative leaders believe the plan will survive a challenge because of the funding guarantee and the decrease in employee contributions.

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