CHICAGO Dec 5 (Reuters) - Illinois Governor Pat Quinn signed into law on Thursday landmark reforms to the state's woefully underfunded public pension system, prompting unions to begin preparing court action to challenge the law.

The governor's signature, in a private ceremony, came just two days after the measure was approved by lawmakers. Public labor unions immediately announced that they have directed their attorneys to prepare to file a lawsuit aimed at derailing the law, which takes effect in June.

With the state's finances buckling under the weight of a nearly $100 billion unfunded pension liability, leaders of the Democrat-controlled legislature on Tuesday pushed through a controversial bill that reduces and suspends cost-of-living increases for retiree pensions, raises retirement ages and limits the salaries on which pensions are based.


"This is a serious solution to address the most dire fiscal challenge of our time," the Democratic governor said in a statement announcing the bill's signing.

Attending the signing were House Speaker Michael Madigan and Republican leaders, but not Senate President John Cullerton, who was unable to make the event, according to Quinn's spokeswoman. Cullerton, who supported the bill, had also pushed for another measure earlier this year supported by unions that would have given workers a choice between pension cuts and state-sponsored healthcare in retirement.

The law's reforms are expected to save Illinois $160 billion over 30 years, while immediately reducing the unfunded pension liability by 20 percent, Madigan told lawmakers on Tuesday.

The law offers workers and retirees some sweeteners, including a reduction in their contributions toward pensions and a method for ensuring the state fully makes its contributions.

But We Are One Illinois, a union coalition, in a statement issued in response to the signing called the measure illegal and "attempted pension theft." The group also said it will seek a court order to stop the law's implementation pending a ruling in the lawsuit.

"Once overturned, its purported savings will evaporate, and the state's finances and pension systems will be left in worse shape," the coalition said in the statement.


The unions contend the law violates prohibitions in the Illinois Constitution against diminishing retirement benefits for public sector workers. A union spokesman said decisions on when and where a lawsuit will be filed have not yet been made.

The law includes a preamble section seemingly designed to counter a legal challenge that concludes Illinois' fiscal problems could not be solved without changes to the retirement system structure.

Credit rating analysts said on Wednesday that the bill's passage was a positive development. But it was unclear if the action would lift Illinois' credit ratings, which are currently the lowest among all the states.