CHICAGO – Moody’s Investors Service called Illinois Gov. Pat Quinn’s proposed package of pension reforms a “credit positive” on Monday.

Quinn has sought to focus attention on the state’s mammoth unfunded pension obligations of $82.9 billion in the current legislative session and he unveiled reform proposals on April 20. Some of his reforms received bipartisan praise, while others have been criticized, and unions have attacked them as unconstitutional.

“The administration’s recognition of the need to substantively the pension system is credit positive for the state … which has struggled to address its pension challenges for decades,” Moody’s lead Illinois analyst Ted Hampton writes in the agency’s weekly credit outlook report. The agency earlier this year downgraded the state general obligation rating one notch to A2 with a stable outlook, making it the lowest-rated state it reviews, due primarily to its pension obligations.

The package asks employees to move to a plan that raises contributions and retirement ages and ends automatic cost of living increases, in exchange for keeping health care subsidies in retirement and other perks. The state also would phase in the requirement that school districts begin covering their teacher pension payments. Currently, only Chicago does so.

The voluntary shift to a new plan is an attempt by the governor to survive a legal challenge since Illinois’ constitution affords strong protections to pension benefits. Some lawyers have suggested the protections apply only to accrued benefits and the state could change benefits going forward, but others disagree. By shifting employees to an entirely new plan, the administration hopes the changes would be upheld.

“This approach underscores the political and legal difficulty of decreasing current employees’ benefits,” Moody’s wrote.

The overall package would trim between $65 billion and $85 billion off state payments under the current funding plan that runs through 2045. Under the current schedule, about $5.2 billion of the proposed $34 billion fiscal 2013 budget will go to cover payments to a pension system that is only 43% funded. The reforms would shave payments by 19% to 24% and fully fund the system by 2042.

With a legislative hearing set for later this week on the pension proposals, House Speaker Michael Madigan, D-Chicago, has proposed legislation that would end the current health care subsidy formula for future retirees. The move could increase pressure on unions to support pension reforms in order to preserve the subsidy.

Currently, the state covers 5% of a retiree’s health care premium for every year of service. Illinois had an unfunded other post-employment benefits liability of $28.6 billion in 2010, up from $27.1 billion a year earlier, according to its most recent bond offering statement. To meet the annual required contribution needed to fully the liability, the state would need to pay $1.9 billion. It paid only $532 million in 2010.

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