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Illinois again fails to act on pensions, risking credit downgrade

By Joanne von Alroth

SPRINGFIELD, Illinois (Reuters) - The Illinois legislature adjourned on Tuesday without acting to restore the health of the nation's most underfunded state pension systems, risking another downgrade of its already low credit ratings.

After days of wrangling at the state Capitol of Springfield, lawmakers ended their last meeting of a "lame duck" legislative session without voting on a pension reform measure.

Majority Democrats, worried about opposition from labor unions, realized they did not have enough support to pass a reform proposal and decided not to vote on any measure.

Failure to act means that work to fix a pension shortfall of $96.8 billion will have to start from scratch when a newly elected legislature is sworn in on Wednesday.

Moody's Investors Service warned last month that without action on the pension problem, it could downgrade the current A2 Illinois debt rating, the lowest among the states it rates. A lower credit rating could increase the cost of borrowing.

The latest failure underscores the problems Illinois faces in dealing with its "most pressing challenge," Moody's analyst Ted Hampton said on Tuesday after the legislature adjourned.

"Each time the General Assembly has difficulty reaching a consensus it seems to reinforce the idea this is a real steep hill the state has to climb," Hampton said.

Standard & Poor's Ratings Services' downgrade of Illinois' credit rating to A with a negative outlook in August reflected in part the lack of action on pensions, S&P analyst Robin Prunty said on Tuesday.

She added the progress on reforms will be a key factor for the state's rating over the next year or so.

Warning of a credit downgrade and economic doom, Democratic Governor Pat Quinn tried on Tuesday to push through a plan to form a commission to recommend a fix to the pension problem. Under his plan, the commission's recommendations would have become law unless the legislature voted to reject them.

Dan Montgomery, president of the Illinois Federation of Teachers, said the measure represented a "hail Mary" pass by Quinn.

"It's a rather sad attempt to get something done," he said during a House committee hearing on the measure.

Illinois state finances are buckling under the weight of sizeable and growing annual pension payments that are siphoning money for essential state services such as healthcare and public safety.

Illinois is among a number of states and local governments facing a financial crisis because they failed to adequately fund their pension systems for years, especially during the Great Recession in 2008-09, which hurt government revenues.

Legislation aimed at fully funding the Illinois pension system in 30 years by boosting worker contributions, raising retirement ages and limiting cost-of-living adjustments for retirees failed to get enough support.

Labor unions, which are major contributors to the campaigns of the majority Democrats in Illinois, strongly oppose the proposal. They have threatened to challenge any changes to pensions in court as unconstitutional. The Illinois constitution has strong protections for pension benefits.

(Reporting By Joanne von Alroth; Additional reporting by Karen Pierog in Chicago; Editing by Greg McCune and Steve Orlofsky)

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