Many public employees and their politically influential unions are wary of changes that they fear would renege on retirement benefits. Bob Neil of the Rhode Island Association of Fire Fighters said workers want to ensure the state honors its promises.

"They're changing the rules in the middle of the game," he said. "They're making decisions that affect people who have worked their whole lives."

The proposal is designed to stabilize the state's pension system while reining in runaway costs that Chafee and Raimondo said will eventually swamp state and local governments.

Estimates put Rhode Island's unfunded liability for public workers' pensions at $7 billion, nearly as much as the entire state budget for one year.

If nothing is done, the annual taxpayer contribution to the retirement plans of state workers and teachers is projected to grow from $370 million per year this year to $615 next year.

Chafee, an independent, said the pension crisis "hangs like a cloud" over the state and threatens to drag down governments and scare businesses away. He held out the bankrupt city of Central Falls as an example of what might happen if lawmakers fail to act.

"We could do nothing at all and wait for the painful experience in Central Falls to replicate itself in cities and towns throughout the state," he said.

The plan, as proposed, would cut the state's unfunded liability to $4 billion, saving the taxpayers an estimated $3.3 billion over the next decade.

Under the proposal, public workers would keep any retirement benefits earned through June 30, 2012. Starting July 1, most employees would contribute 3.75 percent of their salaries to a traditional pension and 5 percent to a 401(k) retirement account. Most employees not already eligible to retire would also see higher retirement ages.

Automatic cost-of-living pension increases would be halted until the retirement system becomes more stable. Current projections from Raimondo suggest it could be 19 years before most employees see an increase. Then, increases would be dependent on gains in pension investments.

Under the state's current system, when pension fund investments don't perform as projected, it's up to taxpayers to make up the difference needed to pay benefits. By combining traditional pensions with 401(k)-style investment accounts, the plan aims to balance the risk between taxpayers and state employees.

The proposal would also require cities and towns operating their own pension systems to show progress in stabilizing their finances or face penalties including a reduction in their share of state funds.

Most states have grappled with their own pension problems as the cost of benefits increase while pension funds reel from Wall Street losses and state budgets absorb deep recession-induced cuts. Some now make workers contribute more toward their retirement while others have raised retirement ages or cut benefits. Indiana and Utah now offer 401k-style plans for certain workers alongside old-style pensions.

In Rhode Island, public sector unions are threatening to challenge the proposal in court should it pass. But union leaders said they'll first try to work with lawmakers to revise the proposal.

"This bill needs work," said Bob Walsh, executive director of the National Education Association of Rhode Island. "They're trying to solve a half century old problem in a very short period of time."

Raimondo pleaded with lawmakers not to "water down" the proposal by taking out the more contentious elements.

"This will take courage," she told them. "I ask you to put politics aside. Put solutions ahead of politics."

Lawmakers plan to hold the first hearing on the proposal next week. Lawmakers plan to spend weeks reviewing the legislation before sending it to a vote.