CHICAGO — Illinois' move to raise new revenue through an income-tax hike last year could not stave off a downgrade Friday by Moody's Investors Service, which cited the state's failure to address its massive unfunded pension obligations and chronic bill-payment delays.

The agency lowered the state's general obligation rating one notch to A2 from A1 and assigned a stable outlook. It previously carried a negative outlook.

The action makes Illinois Moody's lowest-rated state.

The review came ahead of the state's competitive sale of $800 million of new-money, taxable and tax-exempt GOs set for Wednesday.

Fitch Ratings affirmed the state's A rating and stable outlook earlier in the week while Standard & Poor's affirmed its A-plus and negative outlook.

Moody's also downgraded Illinois' $2.47 billion of sales-tax-backed bonds to A2 from A1, while $2.5 billion of Metropolitan Pier and Exposition Authority and Civic Center bonds were downgraded to A3 from A2. A total of $32 billion of GO and other debt was affected.

"The downgrade of the state's long-term debt follows a legislative session in which the state took no steps to implement lasting solutions to its severe pension underfunding or to its chronic bill-payment delays," analysts wrote. "Failure to address these challenges undermines near- to intermediate-term prospects for fiscal recovery."

Analysts questioned Illinois' political willingness to impose "durable policies leading to fiscal strength." They did acknowledge the state's success in reaching an agreement on a temporary income-tax increase last year that is expected to raise $6.8 billion in new annual revenue. The increase helped stabilize finances and reduced the use of one-shot revenues to balance the budget.

The state's unfunded pension liabilities at the close of fiscal 2011 last June totaled $82.9 billion, up about $7 billion over the previous year, for a funded ratio of 43%. The unfunded liability is based on a actuarial model that smooths investment results over five years. Officials expects to close out fiscal 2012 in June owing billions in unpaid bills and other obligations.

A spokeswoman for Gov. Pat Quinn sought to focus attention on the Fitch and Standard & Poor's rating affirmations and use the Moody's downgrade as a means to push pension and spending reforms in the upcoming legislative session.

"All three rating agencies as well as the investors in our bonds are clearly telling us we need more pension reform. Moody's clearly acknowledges that prior administrations left pensions underfunded, creating this huge unfunded liability we face today," said Kelly Kraft.

Quinn also is expected to continue to press lawmakers to support additional borrowing to pay down bills.

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