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Illinois vote looms on long-awaited pension reform

SPRINGFIELD, Illinois (Reuters) - Unions representing public employees in Illinois blasted a bill to reform the state's woefully underfunded pension system on Tuesday and said they would take legal action if the bill is passed by the legislature.

The withering criticism came as lawmakers gathered at the state capitol to decide whether Illinois' pension system -- the worst-funded among the 50 states -- is finally ready for reform. The Illinois House and Senate are scheduled to take up a bill later on Tuesday that would raise retirement ages, reduce and suspend cost-of-living increases for pensions, and limit the salaries on which pensions are based.

Ahead of the vote, a special legislative panel on pension reform held a hearing on the bill.

"There's only one way to describe that kind of blatant taking of one's life savings - we call it theft," said Dan Montgomery, president of the Illinois Federation of Teachers.

Montgomery said the bill is "blatantly unconstitutional" and predicted it would be tossed out by Illinois courts.

Leaders from the Illinois Fraternal Order of Police, the Teamsters and the Illinois Education Associations all testified at the hearing that the bill is unconstitutional.

House Speaker Michael Madigan countered that the cash-strapped state can no longer pay for the retirement promises made to teachers and state, university and college workers.

"Illinois' pension systems are just too rich to be afforded as the state goes forward," he said at the hearing.

Democratic and Republican leaders of the House and Senate last Wednesday announced a deal on a plan aimed at saving Illinois an estimated $160 billion over 30 years.

The plan came after a failed effort in the legislature's spring session, a summer of wrangling by a special legislative committee, and weeks of closed-door talks among the leaders. It also followed years of discussion and study, previous reform measures that provided limited improvements or failed to pass, and numerous downgrades of the state's credit ratings.

State unions claim any imposed cuts to pensions would violate the state constitution's prohibition against impairing retirement benefits for public employees. Business groups have thrown their support behind the measure.

Illinois has a nearly $100 billion unfunded pension liability. It also has the lowest credit ratings of any state.

The new measure offers some sweeteners for workers and retirees. Employees would contribute 1 percent less of their salaries toward pensions, while contributions from the state, which has skipped or skimped on its pension payments over the years, would be enforced by the Illinois Supreme Court. A limited number of workers would also have the option to choose a 401(k)-like investment vehicle for retirement.

The legislature ended its spring session on May 31 at an impasse over whether to impose pension changes on workers and retirees or give them a choice between benefit cuts and access to state-sponsored health care in retirement. Union officials on Tuesday argued in favor of legislation that would give their members a choice.

In a preamble section, the bill lays out an argument seemingly designed to thwart a potential constitutional challenge. The state's finances are so squeezed by pension payments, the section argues, that Illinois has been forced to cut funding for core services such as health care and education. The preamble also alludes to Illinois' structural budget deficit, fueled by billions of dollars in unpaid bills spilling from one fiscal year to another.

Continued inaction on pension reform has hurt ratings on Illinois debt, with credit agencies warning of further downgrades, and investors in the U.S. municipal bond market are demanding higher yields to hold the state's bonds.

"Having considered other alternatives that would not involve changes to the retirement systems, the General Assembly has determined that the fiscal problems facing the state and its retirement systems cannot be solved without making some changes to the structure of the retirement systems," the preamble states.

As a vote on pension reform looms, Illinois is readying the sale of $350 million of taxable general obligation bonds for next week.

(Reporting by Joanne von Alroth in Springfield, Illinois; additional reporting by Karen Pierog in Chicago; Editing by David Greising, Ken Wills and Leslie Adler)

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