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Union-backed pension fix advances in Illinois Senate

SPRINGFIELD, Illinois (Reuters) - An Illinois Senate committee on Wednesday passed a union-backed plan to reduce the state's nearly $100 billion unfunded pension liability by an estimated $15.7 billion.

The Senate measure was crafted as an alternative to a bill passed by the state House of Representatives last week that is estimated to reduce underfunding by $30 billion.

Unions have vowed to contest the House plan in court.

The Senate plan now heads to the full chamber for a vote expected on Thursday.

State lawmakers are under pressure to deal with the unfunded pension liability. Costs arising from the underfunding are threatening the delivery of core state services such as education and health care, and the pension crisis has pushed Illinois' credit rating to the lowest level among states.

Ahead of the 10-5 vote by the Senate Executive Committee, Senate President John Cullerton said the measure does not conflict with the state constitution's protections for public worker retirement benefits. The bill gives current workers and retirees choices in how reductions in pension or health benefits will affect them, in contrast to the House measure's unilateral changes in pension benefits.

"Clearly, this is a stronger argument for constitutionality than others out there," Cullerton said.

The plan, which surfaced on Monday, received backing from union officials who testified in favor of the bill on Wednesday, saying it was a fair and constitutional way to help the nation's worst-funded state pension system. Many of the same union leaders have criticized the House effort, which passed narrowly late last week just two days after it was introduced by the powerful Democratic House speaker Michael Madigan.

"Offering choices is what makes this legislation constitutional," said Michael Carrigan, president of the Illinois AFL-CIO.

He also said that the coalition of labor unions would withdraw its support for the measure if any substantive changes are made by the Senate or House.

However, retired Illinois teacher and state worker groups are warning they could sue over Cullerton's bill. Bob Pinkerton, vice president of the Illinois Retired Teachers Association, which has 35,000 members, told the committee the group has a legal fund exceeding $100,000 in case it deems a constitutional challenge necessary. The teachers union was not part of union discussions last week with Cullerton that led to drafting of the bill.

Rudy Kink, executive director of the 6,000-member Illinois State Employees Association Retirees, told Reuters his group will make a decision on a legal challenge once a final pension reform plan is enacted.

"The whole final thing rests with the (state) Supreme Court," he said.

Cullerton acknowledged that his measure would not save as much as Madigan's, which is expected to cut the unfunded liability by $30 billion and savings over time would allow the state's pension systems to reach full funding by 2044.

Cullerton said the unfunded liability would fall by as much as $15.7 billion under his bill, while the retirement system in 30 years would achieve a 90 percent funded level, which still tops the 80 percent level considered healthy.

Cullerton's approach offers an incentive - called a "consideration" in pension parlance - designed to persuade workers to accept changes in their pension benefits. Employees who agree to the changes would do so willingly, and receive a benefit for doing so, and this tradeoff would address a constitutional ban on reduction of pension benefits.

Under Cullerton's plan, current workers would be given choices involving changes in cost-of-living adjustments for pensions, higher contributions, and the use of future raises to determine pension payments.

In return, they would have access to state-sponsored health care in retirement. Retirees would have to agree to a freeze on current 3 percent compounded cost-of-living allowances to retain their health care coverage.

The measure is similar to one passed by the Senate in March that dealt solely with the Teachers' Retirement System, the largest of the state's five pension funds.

The Cullerton plan does have some similarities to Madigan's bill. Like that measure, it also requires the state to make timely and adequate pension contributions, while also exempting pension changes from collective bargaining.

Madigan's bill sets a cap on salaries used to determine pensions, limits cost-of living adjustments on pensions for future retirees, increases retirement ages and hikes worker pension contributions.

It also introduces changes to calculating the state's annual pension contributions that are designed to come closer to the actual future cost of pensions.

(Reporting By Joanne von Alroth, additional reporting by Karen Pierog in Chicago)

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