10/05/2012 05:40 pm ET Updated Dec 05, 2012

Chicago Pension Reform: Rahm Emanuel Hopeful For Big Changes In 2013

* Believes lawmakers will pass reforms in January

* Four pension funds face $19.2 bln unfunded liability

* "The alternative is untenable" - Emanuel

NEW YORK, Oct 5 (Reuters) - Chicago Mayor Rahm Emanuel told a Wall Street audience on Friday that he believes Illinois lawmakers will pass needed public pension reforms in January.

"The alternative is untenable," Emanuel said at a Municipal Analysts Group of New York luncheon.

"I think we have crossed the point of whether," said the mayor, a Democrat. "My real question is do they do things that are fundamental" reforms.

The city's four pension funds covering municipal workers, laborers, police, and fire fighters, face a collective $19.2 billion unfunded liability at the end of the current fiscal year.

The Chicago Public Schools, a separate taxing entity that Emanuel controls, has a projected $7.1 billion unfunded pension liability. The school system, the third-largest in the nation, is eyeing a $1 billion budget deficit in the next fiscal year as its pension payment is expected to nearly triple.

In May, Emanuel proposed a plan to temporarily stop cost-of-living increases for retirees, phase in higher worker contributions for pensions, and increase the retirement age. He said at that time the alternative to doing nothing would be allowing the funds to go bankrupt or raising city property taxes by 150 percent.

However, pension reform for Chicago and for the state, which faces its own huge unfunded liability, failed to make it out of the Democratic-controlled Illinois Legislature so far this year.

Emanuel said because 20 to 25 percent of state legislators will be retiring in January, they have nothing to lose by cracking down on pension costs during a session of the current General Assembly that month.

"This is a free vote," he said.

Democrats used a January lame-duck session in 2011 to push through big increases in income tax rates.

A report released by Nuveen Asset Management on Friday compared Chicago's pension funding with New York, Los Angeles and Houston and concluded that Chicago was in the worst shape.

"Not only are Chicago's unfunded pension liabilities much larger than the other cities on a nominal basis, they're also much larger when compared within the context of each city's economic resources," Nuveen said.

Moody's Investors Service in April revised the outlook on Chicago Aa3 general obligation rating to negative from stable, citing a lack of a detailed plan for dealing with the city's growing pension liability.