12/13/2012 07:36 pm ET Updated Feb 13, 2013

Illinois Credit Outlook Lowered To Negative By Moody's

CHICAGO, Dec 13 (Reuters) - Illinois' public pension funding problems, likely to persist if not worsen, led Moody's Investors Service on Thursday to revise the state's credit outlook to negative from stable, putting more pressure on state lawmakers to act.

Illinois' finances are buckling under a $96.8 billion unfunded pension liability while Governor Pat Quinn and various state lawmakers are pushing to get various reform measures passed by the legislature in early January.

But Moody's, which affirmed Illinois' A2 rating, said the passage of any reforms stands a good chance of being challenged in court on the basis of strong state constitutional protections for pension benefits.

"Political pressures, coupled with the threat of litigation, may mean that any reforms enacted have only a marginal effect on liabilities," Moody's said in a statement.

In the meantime, the state's problems could be exacerbated by the partial expiration of income tax rate increases in fiscal 2015, leaving the state with a lower revenue base while pension payments escalate, according to the rating agency.

Abdon Pallasch, Illinois' assistant budget director, said the outlook revision underscores the need for comprehensive pension reform.

"Every day that goes by without action, the pension problem gets worse," he said. "As Governor Quinn has repeatedly warned legislators, sky rocketing pension costs are eating up critical services like education and public safety more and more every day."

Moody's warned that Illinois could face a rating downgrade if pension funding deteriorates further, the state fails to make a required and complete pension payment or enacts reforms that have a limited impact on its pension liabilities.

At A2, Illinois' credit rating is the lowest among states that Moody's rates.

A bipartisan proposal that surfaced in the Illinois House last week would boost workers' pension contributions, raise retirement ages and limit cost-of-living increases for retirees with the aim of fully funding pensions in 30 years.

The plan would also gradually shift pension payments currently made by the state to local schools districts, universities and colleges.

Illinois has skipped or skimped on pension payments for years, leaving it with the lowest funded ratio among states. That ratio fell to 39 percent at the end of fiscal 2012 from 43.3 percent, with both well below the 80 percent level considered healthy.