CHICAGO (Reuters) - Illinois faces a big increase in its future pension contributions after the state's largest public retirement system on Friday lowered its assumed investment rate of return to 7 percent from 7.5 percent.


The vote by the Teachers' Retirement System (TRS) board to lower the rate will trigger an increase in the state's fiscal 2018 payment, according to a statement from the retirement system. The board acted on recommendations from its actuarial consultant.


For fiscal 2017, the lowered rate would have increased the state's contribution to TRS by an estimated $421 million to $4.3 billion, the statement said.


Top officials in Republican Governor Bruce Rauner's administration had tried to head off the vote, warning of a "devastating impact" on the cash-strapped state's ability to fund social services and education.


An impasse between Rauner and Democrats who control the legislature left the nation's fifth-largest state without a full fiscal 2016 budget and only a six-month fiscal 2017 spending plan that is projected to result in a record-setting $7.8 billion funding gap.


"Illinois taxpayers including our social service providers and small business owners were just handed a bill for nearly a half-billion dollars," Rauner spokesman Lance Trover said in a statement.

He added that "questions remain about the legality of today’s action," alluding to concerns raised by Rauner's deputy general counsel that TRS' revised meeting agenda containing the rate change as a voting measure did not comply with the state's open meetings act's 48-hour posting requirement.

TRS Executive Director Dick Ingram disputed there was any violation. He said the board has a fiduciary obligation to do "what is best for the financial sustainability" of the fund and that its action to lower the rate can be overridden by the Illinois Legislature.

"While some seem to think otherwise, nothing we are considering today is precipitate or rushed," Ingram told the board before the vote.

The rate cut was the third by TRS since 2012 and Ingram said he expected the board to consider yet another one in the spring.

Illinois' total fiscal 2017 pension payment to its five retirement systems was pegged at $7.9 billion, up from $7.617 billion in fiscal 2016 and $6.9 billion in fiscal 2015, according to a March bipartisan legislative commission report.

Illinois' unfunded pension liability stood at $111 billion at the end of fiscal 2015, with TRS accounting for more than 55 percent of that gap. The funded ratio was a weak 41.9 percent.

(Reporting by Karen Pierog and Dave McKinney; editing by Meredith Mazzilli and Matthew Lewis)