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Illinois's Pension Funding May Weaken Further Despite Bonds, Moody's Says

Illinois, which has the worst-funded pension system among U.S. states, may see it deteriorate more even if it sells bonds to close the gap, Moody’s Investors Service said.

Moody’s issued its report today after the state last week sold $1.5 billion of bonds backed by payments it receives from a 1998 settlement with tobacco companies. The proceeds will go to pay $1.18 billion of bills for fiscal 2010, which ended June 30, Moody’s said.

Lawmakers recessed until January without approving Governor Pat Quinn’s plan to sell $3.7 billion of bonds to fund this year’s contribution to state pension plans. About $1.7 billion of a $5.3 billion backlog of bills for fiscal 2011 is owed to pensions, Moody’s said. Contributions are below the amount needed to cover unfunded liabilities, Moody’s said.

“The successful execution of this sale is credit positive, even though deficit financings typically are negative,” Moody’s said in the report by analyst Ted Hampton.

“While issuing bonds for operating costs underscores Illinois’s financial weakness,” Moody’s said, selling the pension bonds “would at least limit deterioration in the funded status of the state’s pensions.”

Lawmakers may approve the pension borrowing during sessions scheduled for Jan. 1 to Jan. 12, Moody’s said.

Illinois in 2009 had 50.6 percent of the assets needed to meet its pension obligations to retired state workers, according to data compiled by Bloomberg. The other worst-funded states were Oklahoma at 56.1 percent, Kentucky at 58.2 percent, New Hampshire at 58.5 percent and Louisiana at 60 percent.

To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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