(Adds comment on legislation from Illinois governor)
CHICAGO, April 7 (Reuters) - Legislation to ease funding shortfalls in two of Chicago's four retirement systems is a modestly positive credit step but not a permanent fix, Moody's Investors Service said on Monday.
A bill pending before the Illinois Legislature and based on Chicago Mayor Rahm Emanuel's plan would boost property taxes and reduce retirement benefits for workers covered by the city's municipal and laborers' pension funds.
Moody's said that if enacted into law, the measure would immediately reduce the unfunded liabilities in the two funds.
"However, we expect that the (liability) would then escalate for a number of years before declining. Accrued liabilities would exceed plan assets for years to come, and if annual investment returns fall short of the assumed 7.5 percent, the risk of plan insolvency may well reappear," the credit rating agency said in a report.
Emanuel's office has warned that the two systems face insolvency within nine to 17 years unless changes are made. The funding shortfall is $8.4 billion for the municipal system and $1 billion for the laborers system, according to city documents.
Under the mayor's plan, the city would raise property taxes by $50 million a year over five years while workers' current 8.5 percent contributions to the city's municipal and laborers retirement systems would rise an additional 2.5 percentage points over five years. Current annual 3 percent compounded cost-of-living pension increases would instead be tied to inflation and skipped in certain years.
After breezing through an Illinois House committee on April 2, the bill has stalled. Moody's said that even if the bill makes it out of the legislature, Governor Pat Quinn must sign it. The law would then face potential challenges to its legality under the Illinois constitution, which prohibits the impairment of retirement benefits for public sector workers.
Quinn on Monday told reporters that the bill doesn't conform with his view that Illinois property taxpayers are overburdened.
"They've got to do a lot better with whatever plan they come up with than just heaping a higher and higher property tax burden on everyday people whether they live in Chicago or anywhere else," the governor said.
The city's police and firefighters pension systems are not affected by the new plan. Moody's said city officials are seeking changes to a state law that requires Chicago to increase its contribution to those two funds by $600 million.
"The requirement presents a formidable budget pressure for Chicago," Moody's said.
Last month, Moody's Investors Service dropped Chicago's credit rating one notch to Baa1, citing a massive and growing pension liability that remains a threat to the city's fiscal solvency. Prior to that downgrade, Moody's slashed Chicago's rating three notches in July. (Reporting by Karen Pierog; Editing by James Dalgleish)