(Reuters) - Cincinnati struck a deal with labor unions late on Tuesday to reform the city's troubled $2.4 billion pension system and eliminate an $862 million funding gap over the next 30 years, city officials said in a statement.

The 10-month negotiating process, overseen by a Federal judge, preserves the city's defined benefit pension plan after voters rejected an initiative in 2013 to shift new city workers to the defined contribution plans favored in the private sector.

Under the agreement, the city will transfer $200 million in retiree healthcare savings to the pension fund, suspend cost-of-living increases for three years and calculate those increases using simple interest instead of compound interest.

The city will be required to make a contribution of 16.25 percent of payroll over the next 30 years to fully fund the plan. At present, the 8,600 member plan is just 63 percent funded, according to its actuarial report.

"This settlement requires some sacrifice on all sides, but it will help strengthen the City's financial health and ensures the pension system will still be there for everyone in it," Cincinnati Mayor John Cranley said in a statement.

There is still no formal document on the pension settlement, according to a city spokesman.

U.S. District Court Judge Michael Barrett, who is overseeing the mediation process, has not yet lifted a gag order on all the parties in the case. The order was temporarily lifted on Tuesday night for a news conference. City officials tried to lift the order on Wednesday, but were unable to reach the judge.

Municipalities around the United States are struggling with poorly funded public pension systems. Losses incurred during the financial crisis and the failure to make required contributions have left plans on an unsustainable trajectory.

Cincinnati was required to pay contributions equal to 49 percent of its payroll, a level the city did not make. The median state and local government contribution is about 13 percent.

In fiscal 2012, the annual required contribution was $50.0 million, of which the city contributed $33.6 million, according to a report published by Standard & Poor's when in downgraded the city to AA- from AA+ in March.

(Reporting by Edward Krudy. Editing by Andre Grenon)