Lawmakers in the US state of Illinois have a difficult choice in trying to fix the nation's worst-funded pension scheme. They can adopt a plan that saves a lot of money or one that might get through the courts

There's good news and bad news in Illinois' struggle to reform the nation's most underfunded public pension system.

The good news is that plans to address the problem have passed both the state House and Senate. The bad news is that things have gotten so out of hand that state leaders may be forced to choose between one plan that actually helps solve the problem and another with a better chance of passing constitutional muster.

Early this month, Speaker Michael Madigan pushed legislation through the House that would raise the full-benefit retirement age to 67, force employees to contribute an additional 2% of their salaries toward their pensions, and introduce a formula that would provide retirees with far less generous cost-of-living adjustments (Colas).

The following week, the state Senate passed a bill that Senate President John Cullerton had negotiated with public employee unions, which say they will support it. Cullerton's bill would allow employees to choose among several options upon retirement that involve tradeoffs around Colas and state-subsidised health care.

Speaker Madigan's bill would shave $140bn to $150bn off the staggering $381bn that Illinois taxpayers would have to pay to fund public workers' pensions by 2045 under the current system. According to the Civic Federation, a Chicago watchdog group, Madigan's bill would free up at least $1bn more than Cullerton's for schools, health care and other needs in next year's budget alone.

Cullerton's legislation would save only $46bn to $51bn, about one-third as much as Madigan's, and the Civic Federation notes that the Cullerton plan's savings wouldn't even offset this year's increase in how much the state must set aside to fund its pensions.

But Cullerton argues that no savings will be realised if whatever law is passed is later struck down by the courts. His theory is that providing employees with a choice of how their retirement benefits should be reduced is the only way around a state constitutional provision that prohibits diminishing or impairing pensions.

It took decades for things to get this bad. Soon after World War II, it was already clear that Illinois' pension system wasn't sustainable, but nothing was done until a 1969 state constitutional convention. There, in a move reminiscent of the recent federal sequester, delegates attempted to prod the legislature to act by adding the prohibition on cutting pension benefits to the state constitution. The theory was that legislators would never be so irresponsible as to not fix the system when the option of cutting benefits later was foreclosed.

But, just as sequestration turned out not to be too bitter a pill for Congress to swallow, the Illinois legislature didn't fix the state's pension system. Instead, it went on routinely reducing - or skipping - annual pension payments. Today, the system faces a $98bn unfunded liability. Pensions consume nearly one-quarter of the operating revenue the state generates from taxes and fees. Without reform, that number will reach 35% by 2033.

In a recent editorial, the Chicago Sun-Times pointed out that despite the backing of the unions with which Senate President Cullerton negotiated, it would take just one state employee unhappy with the benefit cut to sue. A likely candidate would be the Illinois Retired Teachers Association, whose vice president characterised Cullerton's choices as 'either jump off a cliff or I'll shoot you'.

Whether it means biting the bullet now or big tax increases later, Illinois is going to have to fix its pension system. Given that reality, the best choice is to roll the dice and hope Speaker Madigan's plan passes constitutional muster. But the real lesson here, of course, is not to let things get to this point in the first place.

Charles Chieppo is a research fellow at the Ash Center of the Harvard Kennedy School. This post first appeared on Governing.com's Better, Faster, Cheaper Blog