CHICAGO – Fitch Ratings moved Monday to punish Illinois’ inaction on pension reform during its legislative session by knocking its general obligation and appropriation ratings down one level and warning of the potential for further deterioration by assigning a negative outlook.

Fitch lowered the state’s GO rating on $27.5 billion of GO debt to A-minus from A and assigned a negative outlook. It lowered the rating on appropriation bonds to BBB-plus from A-minus. Illinois’ GO rating now matches California at the bottom among states although it carries a positive outlook.

Lawmakers ended their regular session late Friday deadlocked over how to reform the state’s faltering pension system burdened by $95 billion of unfunded liabilities. Fitch put the blame squarely on their failure.

“Fitch believes that the burden of large unfunded pension liabilities and growing annual pension expenses is unsustainable, and that failure to achieve reform measures despite the substantial focus on this topic exacerbates concern about management’s willingness and ability to address the state’s numerous fiscal challenges,” lead analyst Karen Krop wrote.

“Today’s downgrade is no surprise. As I have repeatedly made clear to the General Assembly, this will continue to happen until legislators pass a comprehensive pension reform bill, and put it on my desk,” Gov. Pat Quinn said in a statement.

The state is now the lowest rated among all three rating agencies.

The state needs to address both its pension funding crisis and budgetary pressures to avoid a subsequent Fitch downgrade as the expiration of a portion of the 2011 income tax looms in fiscal 2015 and the state is carrying a $6 billion bill backlog.

“Deterioration in the state's financial position, as evidenced by excessive use of non-recurring revenues or additional payment deferrals would likely lead to a negative rating action,” Fitch wrote about its outlook. “In addition, Fitch continues to believe that pension reform that enhances the funding levels of the pension systems and controls the growing impact of pension payments on the budget is necessary to stabilize the credit.”

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