Calling the Chicago pension crisis the worst in the nation is saying something - like, how bad can it get?

The city's underfunded pension system for teachers, firefighters, police, and transit workers threatens to punch a hole in the city budget that would devastate city services. The teachers' alone are $1 billion short of funds, while the city as a whole is looking at a whopping $27 billion shortfall.

The state of Illinois is even worse off with more than $100 billion in unfunded pension liabilities. Where is the money going to come from to fix the problem?

Financial Times:

But this month, after years of inaction, Illinois passed a bill to tackle its unfunded pension liability. The state hopes the new law will save $160bn over the next 30 years - savings that will come from cuts in retirement benefits for state workers and forcing the state to make its pension contributions. The law has won plaudits as a first step towards fiscal reform. But it comes only after repeated downgrades that have left Illinois with the lowest credit rating of any US state.

Now it is up to Mr Emanuel, the hard-nosed former Obama administration official, to do the same for Chicago. Any proposal to solve the city's pension problem is bound to look much like the state deal - cutting benefits for public workers and raising contributions.

"The pension crisis is not truly solved until relief is brought to Chicago and all of the other local governments across our state that are standing on the brink of a fiscal cliff because of our pension liabilities," Mr Emanuel said after the state deal.

The Chicago teachers' pension fund is roughly 54 per cent funded, far below the 80 per cent threshold considered healthy. But it is better off than the city's municipal workers, police, labour and firefighters' pension funds, which Fitch, the credit rating agency, estimates are collectively 33 per cent funded.

Mr Emanuel has warned that failing to reform Chicago's pensions by next year could force cuts in services - including the police department, at a time when the city has had the highest number of murders in the US. The alternative, he says, would be a 150 per cent rise in property taxes.

His administration points to the recent reform of the city's parks department's pension system as a model. Retirement ages were raised, with workers no longer able to retire at 50 with full benefits, employees will pay more towards their retirements and the city will increase its contributions.

Still, Mr Emanuel has been criticised for backing plans to delay some payments, and Moody's has attacked Chicago's latest budget for failing to set aside enough money for pensions. And the unions are preparing to fight back in Chicago, just as they have against the state deal, which they are challenging in court. A coalition of unions called the state reform "attempted pension theft".

Not surprisingly, Chicago already has every high property tax rates and raising them 150% would almost certainly lead to a Detroit kind of exodus. Forcing workers to pay more for their retirement is only a partial solution. What's needed is radical surgery to alter the concept of public pensions, moving from defined benefit plans to defined contribution plans. The savings would be enormous. The problem is, you can't grandfather in defined contribution plans. Workers already receiving pensions under defined benefit plans would continue to do so. And for those workers close to retirement, it would be unfair to change their pensions just before they begin to collect.

There are no easy solutions as cities across America face up to this "pension bomb." Eventually, many observers believe Washington will have no choice but to step in and bailout the worst of them or we'd have catastrophic chain reaction bankruptcies across the country. No politically palatable fix is out there. Politicians are going to have to bite the bullet in order to deal with the crisis.