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Gov. Rod Blagojevich signed the new law Wednesday at an elementary school in the Chicago suburb of Cicero.
The money will be doled out in $50,000 grants to help schools pay teacher salaries and benefits.
Blagojevich says he hopes to expand the project by getting more money for it in the upcoming fall veto session.
The Illinois Federation of Teachers union has supported the move to reduce class sizes.
The governor says it will help children learn.