CHICAGO — Moody's Investors Service late Thursday revised its outlook on Illinois to negative from stable, warning that the state's massive unfunded pension obligation will likely worsen over the near term.

It's the latest blow to the state's credit stemming from its $97 billion unfunded pension obligation with a 40% funded ratio — the worst among states.

Lawmakers' ability to enact serious reform remains uncertain amid strong political pressures and likely legal challenges, Moody's said.

The scheduled 2015 partial sunset in of recently enacted income-tax increases will further strain the state's balance sheet, the ratings agency said.

Moody's maintained its A2 rating on Illinois, the lowest among states, and warned that failure to enact reform could mean "further, substantial credit deterioration."

The ratings action comes as lawmakers are set to return to Springfield in early January to try to hammer out a reform package during the last week of their lame-duck session.

Legislators repeatedly failed to address reform last year and have yet to agree on a new reform package as they head back to the capital.

"When we lowered the state's rating in January, we noted that the state might be unable to muster the political will to address its pension liabilities this year," Moody's analyst Edward Hampton wrote in the report. "A sense of urgency is growing and the governor is exhorting action within four weeks, but neither the governor nor legislative leaders have articulated a preferred course of action. We therefore see substantial risk of outcomes other than successful pension reform, suggesting that the steady growth in pension funding pressure will continue."

Any reforms that are enacted face likely legal challenges due to the state's constitutional protections for retiree benefits.

The scheduled gradual phase-out of income-tax increases that were enacted in 2011 begins in 2015 and will coincide with rising pension contributions requirements, Hampton noted.

Illinois' pension problem has sparked a series of negative ratings actions during the last year. Moody's in January downgraded the state to A2 from A1, and warned in mid-August that ongoing failure to address reform was a drag on its credit.

Standard & Poor's in late August hit Illinois with a downgrade to A with a negative outlook. Fitch Ratings assigns an A rating and stable outlook.

Gov. Pat Quinn has urged lawmakers to pass reform before the formal start of the new legislative session on Jan. 9.

"We continue to work with legislators every day on this pressing issue," Abdon Pallasch, Quinn's assistant budget director, said in an email. "Members of the General Assembly have a clear opportunity to enact comprehensive pension reform and Illinois cannot afford to waste it."

California and Illinois are the only two states in the single A category.

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