CHICAGO - Concerned over the impact on a struggling real estate market, the Chicago City Council reluctantly approved yesterday an increase in the city's tax on real estate transactions - a key funding component of the transit bailout package recently endorsed by the state General Assembly.

The tax - known as the real estate transfer tax - will go up by 40% to $10.50 per $1,000 of a property's sale price from $7.50 on April 1. The measure is expected to generate about $100 million annually. The revenues are earmarked for Chicago Transit Authority pension plans.

The tax was part of a larger package approved by the General Assembly last month that included a sales tax hike in the Chicago region that will raise another $400 million for the Regional Transportation Authority of Illinois and its services boards that include the CTA, Metra commuter rail and Pace suburban bus service. The bill required that the City Council agree to raise the transfer tax.

The package includes a provision that allows the CTA to issue up to $2 billion of debt to restructure its pension-related liabilities. Unions also will contribute more to pension costs and forgo some current benefits. The CTA will use revenues from the real estate transfer tax to repay the borrowing.

Officials had warned of deep service reductions and increased fares if no new revenue source was found to help shore up annual operating deficits. City council members said they felt their hands were tied by state lawmakers who required that the transfer tax increase be part of the package.

"The state legislature has really put us in a bad position on this issue," said Alderman Ed Smith, who called the vote a tough decision but said he had little choice given his community's dependence on public transit.

Realtors also warned that the tax would only further strain the already struggling housing market - hit with slowing sales and foreclosures. The real estate tax increase also comes just a couple of months after council members cast another difficult vote - raising about $275 million in other taxes and fees to shore up the city's 2008 budget.

The real estate tax eventually won approval in a 41-6 vote after many council members stood to voice their frustration with state officials. The council approved the plan, however, only after adding an exemption to the tax increase for seniors and making the transfer of the tax revenues a line item in the city's budget.

That will require the CTA to appear before the council's budget committee annually. The move was sought after it was disclosed that just 7% of the CTA's pension investments were managed by minority-owned firms, with no Latino firms in that small mix.

Skyrocketing growth in CTA's unfunded pension ratio prompted the General Assembly to approve in 2006 legislation that would have required a massive increase in both the CTA and its employees contributions to $150 million from $51.7 million in 2009 in order to bring the funded ratio up to a 90% ratio by 2058.

The CTA's pension fund had been on track to exhaust its portion of funds that cover retiree health care benefits this year and faced insolvency in 2013 absent last month's General Assemby bailout package. Under the plan, the CTA can issue up to $2 billion in bonds in order to bring the funded ratio of the CTA fund to a 72% level from its current 25.2% and to establish a trust to begin funding retiree health care benefits on an actuarial basis. q

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