CHICAGO -- For years, Illinois' multibillion-dollar pension crisis has dragged down the state's finances and jeopardized the retirement funds of hundreds of thousands of public employees. Yet lawmakers remained sharply divided on how to fix the problem.
They will take another shot at it Tuesday, when legislators are scheduled to return to the Capitol to consider a compromise that emerged last week. While many unknowns remain about the impact of the plan, here's some background and the basics of what will be a hotly contested -- and potentially historic -- vote:
The problem: 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. That funding level is the lowest of any state in the nation.
Why it matters: 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.
How we got here: 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 factors include economic downturns, lower-than-projected market performance and beneficiaries living longer.
The proposed fix: Illinois' four legislative leaders -- two Democrats and two Republicans -- say their compromise announced Wednesday would save $160 billion over 30 years and fully fund the systems by 2044. According to a memo from legislative leaders, the proposal would:
Ÿ Raise the retirement age for people age 45 and under on a sliding scale basis.
Ÿ Decrease the employee contribution by 1 percent.
Ÿ Guarantee the state will make its full annual contribution to the funds and allow the systems to sue if the payments aren't made.
Ÿ 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.
Ÿ Cap the amount of salary on which a pension benefit is based. In 2013, that amount would be about $110,000.
Ÿ Address "pension abuses" by preventing nongovernment employees from participating in the system and keeping new hires from banking sick or vacation time to boost benefits.
Ÿ Redirect money from pension bond payments to the retirement systems after bonds are paid off in 2019.
Ÿ Mandate that 10 percent of the savings from cutting benefits will go toward the systems starting in fiscal year 2016.
Ÿ Provide workers the option of participating in a 401(k)-style defined contribution plan.
Who supports it: The plan has the backing of all four legislative leaders: House Speaker Michael Madigan and Senate President John Cullerton, both Chicago Democrats, and Republican leaders Sen. Christine Radogno and Rep. Jim Durkin. Gov. Pat Quinn, a Chicago Democrat, also supports it. They and other proponents say it's a critical step to repairing Illinois' finances and ensuring the viability of the pension funds.
Who opposes it: Labor unions are lobbying against it, saying they weren't involved in the negotiations and that the cuts are too severe and unconstitutional. Some conservatives also oppose the proposal, saying it doesn't go far enough and that the funding guarantee will tie the state's hands and take money away from schools, roads and other vital areas.
Legal issues: Unions have said they will sue if the legislation is approved because they say it violates a provision of the state Constitution that state pension benefits can't be diminished. Madigan says legislative leaders included the funding guarantee and the decreased employee contributions in the plan to improve its odds of surviving a legal challenge.Copyright © 2014 Paddock Publications, Inc. All rights reserved.