Illinois pension reform panel zeros in on COLAs

Aug 23 (Reuters) - Cost of living increases for pension checks would be tied to inflation under a plan being considered by an Illinois legislative panel charged with reforming the state's woefully underfunded retirement system, a source close to the negotiations said on Friday.

Employee contributions toward their pensions also would be reduced by 1 percent under the plan being considered by the 10-member bipartisan panel of state lawmakers. Taken together, the two changes could amount to a "consideration" that could help address constitutional challenges to any cuts in pension benefits.

An actuarial review of the plan, which includes other elements, found it could result in $145.6 billion in savings for Illinois through fiscal 2045 and could cut the state's $100 billion unfunded pension liability by $18.1 billion. The pension system for state, university, college, legislative and local school district workers would be fully funded in 30 years.

"This is what they are discussing pretty seriously," the source said.

State Representative Elaine Nekritz, a panel member and the House Democrats' point-person on pensions, said there is no final plan yet. She said COLA changes and contribution decreases could be items under consideration.

"Things are still very much in a state of flux," she said.

The legislative panel is looking at changing the current 3 percent compounded cost of living allowance (COLA) to reflect half of the inflation rate, subject to certain compounding, according to the source.

The plan being hammered out in a series of private small-group meetings could emerge as an alternative to two bills previously proposed by top legislative leaders, neither of which is under active consideration, panel members have said.

One bill, pushed by Illinois Senate President John Cullerton and state labor unions, would give workers and retirees choices between reduced benefits and continued access to state-sponsored healthcare in retirement would save only an estimated $47 billion. House Speaker Michael Madigan's bill, which calls for unilateral cuts to retirement benefits, could result in savings of $187 billion.

Neither bill made it out of the Democrat-controlled legislature's spring session, which ended on May 31. The impasse led to the formation of the panel.

"I would like to think we are close enough to join hands and jump in the pool," Nekritz said, regarding a final plan.

She said a decrease in employee contributions could be used to offer workers and retirees "consideration" for agreeing to cuts in pension benefits. Cullerton's bill offers consideration, while Madigan's does not.

Any pension reform is expected to face a constitutional challenge.

"We want to give ourselves as many arguments before the court as we can," she said.

Cullerton has argued that giving workers a choice is the only way around strong protections for public worker retirement benefits in the Illinois Constitution. And lawmakers, credit rating agencies and others believe any pension changes will be challenged in court on constitutional grounds.

Pension payments are squeezing out funding for core state services such as education and health care. Illinois' structural budget imbalance and pension liability have weakened its credit ratings to the lowest among U.S. states.

Frustrated with continued inaction on pension reform, Democratic Governor Pat Quinn suspended lawmakers' pay starting this month.