CHICAGO — Illinois' battered credit took another blow Wednesday as Standard & Poor's lowered the state's general obligation rating one notch to A as the state struggles with legislative gridlock on pension reform and an ongoing structural budget deficit.

Standard & Poor's warned of possible further action - absent some movement on pension reform or budgetary changes as portions of the state's 2011 income tax hike expires in 2015 - by leaving a negative outlook on the state's rating.

Only California is rated below Illinois at A-minus. California and Illinois are the only states in the single A category.

"The downgrade reflects the state's weak pension funding levels and lack of action on reform measures intended to improve funding levels and diminish cost pressures associated with annual contributions," said Standard & Poor's credit analyst Robin Prunty. "The downgrade also reflects continued financial weakness despite significant measures in the past two years to improve structural budget performance."

The negative outlook reflects the possibility of further erosion of the state's pension funds and the uncertainty and risk to future budget performance as portions of the tax hikes, which generate $6 billion to $7 billion annually, expire.

The latest review comes ahead of the state's competitive sale of $50 million of GOs set for Sept. 13. Offering documents will be released on Friday.

Though Standard & Poor's stressed that several fiscal pressures drove the downgrade, Gov. Pat Quinn squarely put the blame on the General Assembly's failure to act on proposed pension reforms.

The state is weighed down by $83 billion in unfunded pension liabilities - for a 43% funded ratio that is the worst among states - and faces skyrocketing pension payments that rose $1.1 billion to $5 billion in the current $33.7 billion budget.

Political bickering over reforms derailed a package during the General Assembly's annual session this spring and no agreement could be reached as lawmakers met in a special one-day session earlier this month.

"Today's action is no surprise," Quinn said in a statement on the Standard & Poor's downgrade. "Over and over again this summer, I made clear that if we do not act on pension reform, the state of Illinois would suffer the consequences. Now it has."

Standard & Poor's had warned earlier this year that it intended to resolve its negative outlook on the state's rating by the end of the year with a close eye on pension reform.

Quinn stressed fiscal accomplishments of the spring session including a $2.7 billion Medicaid overhaul and allocation of $1.3 billion in the fiscal 2013 budget to pay down a roughly $8 billion bill backlog. He has warned that growing pension obligations are crowding out the state's ability to fund core services like education, healthcare and public safety.

"The only thing standing between Illinois and comprehensive pension reform is politics. We must address the unfunded pension liability and we can only do it together," Quinn said. He will hold a meeting early next month with legislative leaders to discuss the issue.

Moody's Investors Service last week called the failed special session a drag on the state's credit but earlier this week affirmed its A2 rating on $32.8 billion of rated debt, the lowest among states. Fitch Ratings assigns an A rating and stable outlook.

Lawmakers will meet again this fall for an annual veto session but the prospects for reform remain clouded. Quinn wants lawmakers to approve an overhaul that asks workers to voluntarily shift to a new pension plan with reduced cost-of-living increases in order to preserve their health care perks in retirement. He also wants to gradually shift funding for suburban and downstate school teacher pension payments from the state to local districts.

Republican oppose the school district shift over fears of the impact on local property taxes. Democratic lawmakers won't support the COLA changes without the teacher shift.

The COLA changes alone were estimated to trim up to $88 billion off state payments under a schedule that puts the state at full funding in 30 years. The teacher cost-shift savings were estimated at up to $29 billion.


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