By Karen Pierog
CHICAGO (Reuters) - Illinois' public worker pensions will be spotlighted this week in a special legislative session called to address a crisis that has created the lowest-funded retirement system among U.S. states.
Few people except Governor Patrick Quinn, who called the lawmakers back in for the Friday session, are holding out hope of any substantive action on the pension crisis. But the state's fractious politics will likely be the main thing in the glare.
"I just think there's no way to get both sides exposing themselves to political risks and cross currents by passing a comprehensive solution," said Kent Redfield, political science professor emeritus at the University of Illinois Springfield.
The state's already huge unfunded liability for its five pension systems -- for state employees, the legislature, judges, universities, and teachers outside of the Chicago Public Schools -- stands at $83 billion. It is growing by $12.6 million a day, Quinn has warned. The overall funded ratio is only 43 percent.
Many U.S. states continue to struggle with the aftershocks of the recession. But pension problems in Illinois pushed the state's already shaky finances to the edge of a fiscal cliff.
If costs are not reined in, the Democratic governor says the unfunded liability will jump to $92.7 billion when fiscal 2013 ends next June 30.
Pensions already eat about 15 percent of the state's current $33.7 billion general fund budget.
In April, Quinn proposed a pension fix that he said would save taxpayers up to $85 billion over 30 years and result in a fully funded system by 2042.
The plan called for higher employee contributions, lower cost-of-living adjustments and a phased-in retirement age of 67 in exchange for access at retirement to state-subsidized healthcare. That set off storms of protests from union leaders.
Quinn also wants funding for teacher pensions shifted to local districts.
That has put Quinn at odds with not just the legislature's Republicans -- in the minority in both the House and Senate -- but with his own Democratic Party leaders, including the long-time and powerful House Speaker Mike Madigan.
Madigan abruptly pulled his bill calling for a teachers' cost shift in the face of Republican opposition as the spring session ended in May.
"We're all for a comprehensive proposal too. The question becomes how do you muster the votes?" said Madigan spokesman Steve Brown.
The biggest drag on state coffers is the Teachers' Retirement System (TRS), which has $37 billion in assets and accounts for about $44 billion of the state's unfunded liability. It serves 362,000 members, both working and retired.
TRS and the proposed cost shift onto local districts has emerged as the biggest stumbling block to getting meaningful pension changes in Illinois.
With the November 6 general election looming and all seats in the General Assembly in play, neither party wants to incite their constituencies including suburban Chicago property taxpayers for the Republicans and public labor unions for the Democrats.
Quinn and Madigan want school districts outside of Chicago -- which largely funds its own teacher pensions -- to gradually assume pension costs now paid by the state. They say those districts must take responsibility for the costs since they set the salaries that affect teachers' retirement income.
Republicans -- and some Democrats in districts outside Chicago -- fear voter backlash from such a move, which would likely demand higher property taxes.
Madigan, meanwhile, fears alienating Democratic union backers who are loyal foot soldiers for election campaigns. He is chairman of the Illinois Democratic Party, not Quinn.
"Madigan is first and foremost interested in the Democrats winning the majority," Redfield said.
So Madigan has decided to allow the House on Friday to take up a limited pension bill that passed the state Senate in May. But it only affects pensions for state employees and lawmakers by creating a swap between lower cost-of-living increases and state health care coverage in retirement.
The move could save the state "as much as $31 billion over the next few decades," said a spokesman for John Cullerton, the Democratic Senate president.
Quinn objects to the piecemeal move. Redfield said it could work in favor of Madigan and the Democrats. If it passes, they can claim they pushed through some pension reforms. If it doesn't, they can blame Republicans for not producing votes.
Tom Cross, Republican leader of the House, said this week that Quinn should keep lawmakers in session until comprehensive reform is passed. But he also objected to even the limited bill.
"If we do that bill, once it becomes law we will see litigation and we'll cease discussions on pension reform," Cross said.
Lobbyists and political analysts see no miracles on Friday.
Ben Schwarm, deputy executive director of the Illinois Association of School Boards, did not see teacher pensions being solved by lawmakers working "for eight hours one day in August."
"We worked for months in the spring session to find a way to do it," he said on the session adjourned May 31 without a deal.
Union leaders and state employees plan to protest outside the state capitol during the special session.
"The governor is trying to make these employees bear the entire burden of fixing an underfunding problem created by the politicians' persistent failure to make the employers' full share of the contributions," AFL-CIO president Michael Carrigan said on Wednesday.
Quinn and budget analysts say union counter-proposals don't come close to fixing the problem.
At a Tuesday legislative committee hearing on pensions, Josh McGee, vice president of public accountability initiatives at the Arnold Foundation, said Illinois's pension situation, which includes $13 billion of pension bonds outstanding at the end of fiscal 2011 along with the $83 billion unfunded liability, is dire even before applying new governmental accounting standards that will make it look even worse.
"The magnitude of Illinois' current pension debt and the trajectory of the costs are unsustainable under any accounting rules," McGee told legislators.
So the clock is ticking. Illinois' pension burden has contributed to credit rating downgrades even as the state is a major debt issuer in the $3.7 trillion municipal bond market.
Moody's Investors Service rates Illinois at A2, the lowest level among states it rates. Standard & Poor's has warned of a multiple-notch cut in the state's A-plus rating this year if there is no progress on fixing the fiscal mess.
"We have heard many excuses from many who argue to not do pension reform," said Quinn spokeswoman Brooke Anderson. "But those excuses do not address the warnings from the ratings agencies, the draconian cuts that threaten the education of our children, and the reality that we have the worst-funded pension system in the nation after decades of fiscal mismanagement."
(Additional reporting by James Kelleher in Springfield, Illinois. Editing by Peter Bohan and Leslie Gevirtz)