Illinois Pension Crisis Eludes Easy Solutions .

By MICHAEL CORKERY

Lawmakers in Illinois say they may try to fix the state's ailing pension system by asking current workers to pay more into the plan, though the approach faces substantial legal and political obstacles.

The lawmakers are also entertaining the politically difficult idea of applying broader pension changes made this year for newly hired employees to current workers. Those include raising the retirement age and scaling back on annual cost-of-living raises.

Whatever approach is embraced, it remains unclear whether such strategies would fix the Illinois system, which is 45% funded. That makes it the most under-funded state plan in the U.S., according to Moody's Investor's Service.

The proposals come as Illinois focuses on home-grown solutions to its pension difficulties after Gov. Pat Quinn created a stir when he said in his budget proposal last month that the state may need a "federal guarantee" of its pension funds—a reference his office now says was a mistake.

"It should have been edited out," David Vaught, the governor's budget director, said in an interview. "We don't think we need a bailout."

The warning contained in the 472-page budget document raised fears that the state could go hat in hand to Washington, a scenario that some U.S. lawmakers have feared could spur other states to do the same.

Now in Illinois, talk of state-centered pension fixes has drowned out any whispers of a federal bailout.

"There is growing momentum for additional pension reform and this is something that definitely should be looked at," said Mr. Vaught.

He added that if the legislature voted to increase employee contributions in the current legislative session, Mr. Quinn, a Democrat, "would not stand in its way."

Those comments come as Michael Madigan, a Democrat and speaker of the Illinois House of Representatives, has floated the idea of cutting pension benefits for current workers.

Several states including Illinois have already made the legally and politically expedient moves of changing new-worker benefits, such as upping the retirement age. The Illinois measure for new workers will bring some near-term savings, though much of the cost reductions don't kick in until the first wave of newly hired Illinois workers retires a few decades from now.

But rolling back benefits for current workers is likely to prove more difficult.

Illinois has stringent constitutional protections for pension benefits, according to several legal experts. A recently passed bill in nearby Wisconsin requiring employees to contribute to their pensions has already spurred talk of legal challenges there. Many employees in the Wisconsin retirement system contribute nothing to their pensions. Illinois teachers now contribute as much as 9.4%.

One proposal by Republican Illinois House Minority Leader Tom Cross, to increase contributions for some workers to as much as 20%, among other measures, would save an estimated $25 billion.

Critics say these proposals will go only part way in erasing the $82 billion unfunded pensions liability that is projected to grow to $139.8 billion in 2030

The recent stock rally has helped shore up many state pension funds. but Illinois's shortfall is growing. The problem is largely the result of the state's failure for years to make actuarially recommended contributions to the fund.

"Even if you pass aggressive reform, you still have to fund the current liabilities and that is a big number," said Daniel Hankiewicz, pension manager of the state Commission on Government Forecasting & Accountability.

In the past two years, Illinois has had to borrow several billion dollars to make its required contributions to the pension system. Critics say that indicates that the state's pension benefits are simply unaffordable.

Legislative leaders have asked the commission's actuaries to calculate the savings that could come from extending some of the changes the state applied to new workers in 2010 to current workers.

Others dispute a crisis exists. The Teachers Retirement System, one of five funds in the state's pension system and which has 372,000 members, is 48% funded (actuaries typically recommend that plans be at least 80% funded). Fund administrators are not concerned about meeting annual obligations to retirees, says spokesman Dave Urbanek.

"Don't confuse the mortgage with the mortgage payment," he says. "Can I make my entire mortgage payment today, no. But I can make my monthly payments. That is the same with us. We are deeply in debt, but our heads are above water."

The issue may end up being settled in the courts. The chief legal counsel to Illinois Senate President John Cullerton, a Democrat, released a long legal memo earlier this month arguing that retirement benefits cannot be altered unilaterally by the legislature.

The Civic Committee of the Commercial Club of Chicago, a group of business leaders, asked law firm Sidley Austin LLP to look into the issue.

In a memo last year, Sidley argued that the state constitution only protects benefits that have already been accrued.

That leaves open to change benefits that will be earned through future government service, Sidley argued. The law firm has also argued in a separate memo that if the pension funds run out of money, the state does not guarantee that it will pay out benefits.

The legal memo prepared for Mr. Cullerton says the state constitution ensures pension payments will be made, even if the funds run dry.

Write to Michael Corkery at michael.corkery@wsj.com

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