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(Recasts, adds quotes from S&P, governor's budget office, background)
CHICAGO, July 23 (Reuters) - Standard & Poor's Ratings Services on Wednesday warned that Illinois' already low credit rating could sink further if the state is unable to implement reforms to curb its big unfunded pension liability and balance its budget.
The credit rating agency revised the outlook on Illinois' A-minus credit rating to negative from developing, citing a recent state supreme court ruling that could derail a new pension reform law and the state's structurally imbalanced state budget.
"If the pension reform is declared unconstitutional or invalid, or implementation is delayed and there is a continued lack of consensus and action among policymakers on the structural budget gaps and payables outstanding, we believe there could be a profound and negative effect on Illinois' budgetary performance and liquidity over the next two years and that this could lead to a downgrade," S&P said in a statement.
It added that Illinois could achieve a stable outlook if the pension reform law Illinois enacted in December withstands constitutional challenges and the state takes "credible action" to balance its budget.
Illinois' $100 billion unfunded pension liability, along with a chronic and large pile of unpaid bills have left it with the lowest credit ratings among states. The state's new budget has a $2 billion revenue hole halfway through the fiscal year when higher income tax rates will partially expire.
Abdon Pallasch, Illinois' assistant budget director, said the negative outlook was the result of the legislature passing an incomplete budget.
"Governor (Pat) Quinn was clear with legislators this year that bond rating agencies would look with disfavor on a budget that did not contain enough revenue to cover a full year of the state's needs on education, public safety and human services," Pallasch said in a statement. Quinn unsuccessfully pushed to keep the tax rates, enacted in 2011, from expiring.
While constitutional challenges by labor unions and others have put the pension reform law on hold, a ruling earlier this month by the Illinois Supreme Court in another case has raised concerns that the pension law could be tossed.
The high court ruled July 3 that health care for retired state workers is a pension benefit protected by a state constitutional prohibition against being diminished or impaired. S&P said the risk that the pension changes might not be implemented was highlighted by the ruling in the health care case.
The pension reform law reduces and suspends cost-of-living increases for pensions, raises retirement ages and limits the salaries on which pensions are based.
The rating agency had changed the state's rating outlook from negative to developing in December in the wake of the passage of the law, noting the outlook indicated Illinois' rating could be raised or lowered during a two-year horizon. (Reporting By Karen Pierog; Editing by Meredith Mazzilli, Bernard Orr)