(Bloomberg) -- Chicago Mayor Rahm Emanuel reached an agreementwith unions on a way to shore up the smallest of the city’sstruggling pension funds, saying it would createa “path to solvency” after a previous overhaul was struck down bythe Illinois Supreme Court.

The city and two unions reached a pact that -- if finalized --would aid a pension that’s set to run out of moneyby 2029.

The deal would require an increase in contributions fromemployees who want to retire as early as 65 and boost Chicago’spayments into the Laborers’ and Retirement Board Employees’ Annuityand Benefit Fund by no less than 30 percent a year over five years,beginning with the contribution due in 2018. The fund serves some8,000 employees, retirees and beneficiaries.

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“This agreement marks a tremendous step forward in ensuring thatthe city’s employees and retirees have a secure retirement, whileprotecting Chicago’s taxpayers from bearing the entireresponsibility on their own,” Emanuel said in a statement lateMonday.

The arrangement would begin to chip away at Chicago’s soaringdebt to its employee retirement system, which has a more than $20billion shortfall after years of failing to put enough taxpayermoney aside.

The mounting strain on the budget as the city is forced to catchup led Moody’s Investors Service to cut Chicago’s bond rating tojunk a year ago, giving it a lower grade than any big U.S. cityexcept once-bankrupt Detroit.

The laborers’ agreement sets up a template to save the municipalpension. The later has almost $10 billion of unfunded liabilities,eight times the shortfall of the laborers pension.

Bond trading after the city’s announcement signaled investoroptimism around the plan. Federally tax-exempt Chicago bondsmaturing in 2030 traded Tuesday for 44.9 cents on the dollar, thehighest average price since April 2015, according to data compiledby Bloomberg.

“It’s definitely positive that they’ve made some progress, andthey have an agreement,” said Daniel Solender, who oversees $19billion as head of municipals at Lord Abbett & Co. in JerseyCity, New Jersey. “With all their plans, there’s so many levels ofapproval. It’s still some time before we know if it’s really a planthat’ll work.”

The proposal provides a “good framework” for how to approach themunicipal pension, a larger fund, Chicago Chief Financial OfficerCarole Brown said on a conference call with reporters. That fund isset to run out of money within 10 years.

“We’re pretty optimistic about having a solution also for munisin relatively short order,” Brown said.

Some details on the fix are still pending, and it would needstate approval. The city won’t push the needed legislation beforethe end of the regular session of the legislature on May 31. Thecity just presented the plan to the pension fund on Monday and thecity has yet to draft the proposed bill, Brown said.

In March, the Illinois Supreme Court threw out Emanuel’soverhaul of the laborers and municipal workers pension fund thatreduced benefits and increased city and employee contributions.

The new proposal is intended to avoid a court challenge becauseit affects newly hired employees and gives those hired after Jan.1, 2011, the choice of an earlier retirement age in exchange forputting more of their paychecks into the fund.

The deal would still give the pension decades to bring itsassets in line with promised benefits. If implemented, the planwould get it to 90 percent funding -- meaning it has 90 cents forevery $1 it owes -- by 2057.

“Choice is one of the areas that the Illinois Supreme Courtindicated should pass constitutional muster,” Alex Holt, the city’sbudget director, said on a conference call with reporters.

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