Chicago Mayor Rahm Emanuel proposed a $8.9 billion election-year budget on Wednesday, keeping mum about looming pension challenges that could further damage the third-largest U.S. city's credit ratings and trigger payments associated with its debt.

The fiscal 2015 spending plan, which includes a $3.53 billion operating budget, allocates $557 million for Chicago's four pension funds. That payment will top $1 billion in fiscal 2016 under an Illinois law that mandated higher city contributions to its police and fire retirement systems.

Pension pressures could lead to further credit downgrades, triggering payments on swaps, letters of credit and bank notes.

Emanuel, who is facing reelection for a second term, briefly touched on pensions in his budget address to the city council, touting reforms to the city's municipal and laborers' retirement systems that take effect Jan. 1.

"Working with our partners in organized labor, we passed reforms that will shore up the pension plans serving half of our city's workforce - making sure that both retirees and taxpayers are respected," he said.

Those reforms, which are expected to be challenged soon by some unions, require both the city and affected workers to beef up pension contributions, while tying cost-of-living increases for pensions to inflation.

Chicago Budget Director Alexandra Holt said both the mayor and city council were looking to put cost-saving reforms in place for police and fire pensions as well.

Laurence Msall, president of Chicago-based Civic Federation, a government finance watchdog group, said the budget is "fairly conservative" in addressing the city's $297 million deficit.

"We're concerned that there is no longer-term plan being articulated for what to do about the police and fire pensions. What's Plan B if the General Assembly doesn't approve pension reform, or if the courts should happen to find (reforms) unconstitutional?" he said.

The Illinois Supreme Court will eventually decide whether any public worker pensions can be reduced, despite state constitutional protections. Unions and other parties are challenging Illinois' pension reform law, which also lower retirees' payments.

In previous addresses, Emanuel warned that Chicago was facing a fiscal tempest due to pensions. A fiscal analysis issued by Chicago in August said 2016's pension payment jump would inflate the budget deficit from $297 million in 2015, to as much as $1.2 billion in 2016 and $1.5 billion in 2017.

But recent Chicago bond documents indicate that the city is exploring options to shift all or a portion of the increase to future years, a move that would increase the systems' unfunded liabilities.

That, in turn, could trigger downgrades in Chicago's credit ratings. Moody's Investors Service warned in March, when it cut the city's rating to Baa1 from A-minus, of another possible downgrade if there is a "continued unwillingness on the part of the city to raise tax revenue in amounts sufficient to fund annual pension contributions in line with actuarial standards."

Moody's also said Chicago's rating could drop if the Illinois Supreme Court voids the state's pension reform law on constitutional grounds.

In its bond documents, Chicago said further downgrades could accelerate payments on swaps, letters of credit and bank notes associated with a commercial paper program, as well as lessen investor demand for city bonds.

Emanuel said his proposed budget for the fiscal year that begins Jan. 1 is balanced, without new property, sales or gasoline taxes. It would eliminate some tax exemptions, taps money from other city accounts and counts on money from various reforms.

Alderman Bob Fioretti, one of Emanuel's challengers in the February mayoral election, called the budget "election-year fluff" which does not represent a "serious proposal."