CHICAGO (Reuters) - Chicago will not immediately pursue the issuance of up to $10 billion of pension bonds to buoy its underfunded retirement system, under steps Mayor Rahm Emanuel will outline to the city council on Wednesday, a city hall source said on Tuesday.

FILE PHOTO: Chicago Mayor Rahm Emanuel speaks during an interview at City Hall in Chicago, Illinois, U.S. June 14, 2017. REUTERS/Joshua Lott/File Photo

Instead, Emanuel, who is not seeking a third term in office next year, will work with aldermen to create a structure for the debt, leaving it up to them and the next mayor to decide whether to issue the bonds, the source added.

Chicago’s unfunded pension liability was $27.6 billion in 2017 with a funded ratio of only 26.5 percent on an actuarial basis. The big pension burden, along with years of structural budget deficits, led to downgrades of Chicago’s general obligation credit ratings and higher borrowing costs.

Even after raising fees and taxes in recent years to save its four retirement funds from becoming insolvent, the third-largest U.S. city faces pension contributions that will grow to $2.13 billion in 2023 from $1.02 billion this year.

Excerpts from Emanuel’s address released on Tuesday by his press office call for amending the Illinois Constitution to eliminate an obligation to give retired workers a 3 percent annual compounded cost-of-living (COLA) adjustment.

“In fact, over the next 40 years, the city will contribute $42 billion to our pension funds just to cover the cost of the 3 percent annual COLA. That works out to more than a billion dollars a year,” the speech said.

The Illinois Supreme Court has rejected attempts by the state and the city to reduce retirement benefits, citing protections against their diminishment in the constitution.

The idea of securitizing city revenue in a debt issue to aid pensions surfaced during Chicago’s annual investors conference in August.

In October, S&P Global Ratings cautioned the city that the move comes with risk and could have negative rating implications.

Chicago has already employed a bond structure to refund low-rated outstanding debt that securities sales tax revenue with a statutory lien for investors that resulted in higher credit ratings and lower borrowing costs.

Since late last year, Chicago has tapped just over $2 billion of the $3 billion of authorization it has to issue the bonds through a Sales Tax Securitization Corporation.

Twenty-one candidates have filed to run for mayor in the Feb. 26 election, according to the Chicago Board of Election Commissioners.