Illinois lawmakers, who make key financing and benefit choices for Chicago's pension system, have wrestled for months without agreement on the politically troublesome matter of cutting the benefits of public sector retirees to save money. And last month, Moody's Investors Service downgraded Chicago's rating by an unexpected three notches as part of a broad reassessment of how pensions are affecting the financial strength of cities. That "super downgrade," in the parlance of the bond market, left Chicago, the nation's third-largest city, with a lower rating than 90 percent of Moody's public finance ratings.

The financial woes of Detroit, which last month became the nation's largest city to file for bankruptcy protection, dwarf the financial issues here. But as Detroit makes its way through the federal court system, other cities, including Chicago, are wrestling with overwhelming pension liabilities that threaten to undermine their capacity to provide municipal services and secure their futures.



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The pension system in Charleston, W.Va., is so depleted that retirees are being paid straight from the city budget, something experts say is unsustainable. School districts across Pennsylvania, including Philadelphia's, are stumbling as required contributions to a state-run teachers' pension system rise and education money from the state drops. Even prosperous San Jose, Calif., has a pension problem, leading residents last year to vote to slow the rate at which city workers build up their benefits.



Among the nation's five largest cities, Chicago has put aside the smallest portion of its looming pension obligations, according to a study issued this year by the Pew Charitable Trusts. Its plans were funded at 36 percent by the end of 2012, city documents say. Federal regulators would step in if a corporate pension fund sank to that level, but they have no authority over public pensions.



Chicago's troubles, experts say, were years in the making. They are the result of city contributions under a state-authorized formula that failed to accumulate nearly enough money, two economic downturns in the 2000s that led to heavy investment losses, and an impasse in the State Capitol despite urgent calls to cut costs of the state's own pension system. Illinois, which has the most underfunded state pension system in the nation, controls Chicago's benefit and funding levels.



In Springfield, which, like Chicago, is controlled by Democrats, leaders have clashed over how best to cut costs of the plans — a notion that pits the lawmakers against labor unions, which have traditionally been allies.



(Read more: Pension over-promises need renegotiating: Hubbard)

By last week, top Democratic leaders in the legislature sued Gov. Pat Quinn, a fellow Democrat, after he announced he was withholding lawmakers' paychecks until they come up with a plan to fix the state's pension crisis. "That was a drastic step but obviously a necessary one," Mr. Quinn said, describing the pension crisis as "the biggest, most important economic challenge we'll ever have."



State leaders have argued over the meaning of a state constitutional provision protecting government pensions in Illinois, and, in private conversations, over the potential political fallout from unions if benefits are cut. But Mr. Emanuel has openly called for increasing retirement ages, raising workers' contributions toward their own pensions and temporarily freezing inflation adjustments now paid to retirees, all of which amount, union leaders say, to benefit cuts.