(Bloomberg) -- When Illinois lawmakers report to the capital in Springfield today for another attempt at fixing the nation’s worst-funded state pension system, the gathering will have a ring of familiarity.

February 2012: “Today, our rendezvous with reality has arrived,” said Democratic Governor Pat Quinn in his budget presentation to lawmakers, who months later left the statehouse without acting on pensions.

August 2012: “We all look like idiots,” said then- Representative Daniel Biss, a Democrat, after lawmakers failed again to act, this time in a special session.

May 2013: “We have no choice. We have to move forward today,” Tom Cross, the then-House Republican leader, said during another pension debate. They didn’t.

After seven credit-rating downgrades since June 2010, an unfunded pension liability of $100 billion and five aborted attempts in 16 months to shore up the retirement system, lawmakers will try again to pass a bill that would save the state $160 billion over the next 30 years. The governor’s office is bullish. John Sinsheimer, the state’s director of capital markets, said yesterday that Illinois plans to offer $350 million in general-obligation bonds Dec. 12.

Lucy’s Football

The penalty on Illinois general-obligation bonds has extended declines since legislative leaders last week said they had a tentative agreement to stabilize the pension fund. The yield spread on debt due in 10 years relative to benchmark munis fell to 1.7 percentage points on Nov. 29, the lowest since August, according to data compiled by Bloomberg. A shrinking spread usually signals investor confidence that the state’s finances will improve.

Investor expectations have been raised before, only to be dashed in the legislative arena. Illinois’s long-running pension drama, which stretches back decades, reaffirms the belief that politics is a game of addition, not subtraction.

“It’s very hard to take anything away from anybody without a great deal of pain and animosity,” said Doug Whitley, president and chief executive officer of the Illinois Chamber of Commerce.

“They all know it needs to be done. They just don’t want to take the hard vote, primarily for their own political skin,” Whitley said.

All Rise

The proposal legislative leaders agreed to Nov. 27 would limit annual cost-of-living allowances and raise the retirement age for some workers. That would produce the bulk of the $160 billion of savings over 30 years, according to the plan.

Unions, which represent about 760,000 workers and retirees, promised to challenge the measure in court, claiming it violates language in the Illinois constitution that says retirement benefits “shall not be diminished or impaired.”

Even if lawmakers approve a bill, the promised suit will cast a budgetary cloud over the state until the courts rule.

“You know everyone is going to sue,” said Bart Mosley, co-president of Trident Municipal Research in New York. “You don’t get an upgrade on the basis of this any time soon, even if it was to pass easily in a vote tomorrow or later this week.”

Abdon Pallasch, a spokesman for Quinn, said the governor doesn’t expect an improved credit rating at once, but that lawmakers can stop the persistent cuts, which he said have cost the state $180 million just this year.

“The primary reason cited by every bond rating agency that has lowered Illinois’ rating has been the state’s failure to address its pension problems,” he said in an e-mail. “We would hope that a vote for the bipartisan pension reform plan this week would stop those downgrades that have cost Illinois taxpayers so much.”

Government Jobs

The task is complicated by the approach of the 2014 election year. Republican State Treasurer Dan Rutherford, a candidate for governor, said yesterday in a prepared statement he opposes the bill and does “not believe it will withstand judicial review should it pass.”

While Democrats hold veto-proof majorities -- 71-47 in the House and 40-19 in the Senate -- the party’s natural constituency is organized labor. At the same time, most House Republicans in southern Illinois districts that have prisons and state colleges and universities voted against a pension bill in May.

Republican U.S. Senator Mark Kirk in a statement yesterday urged rejection of a bill “that neither lawmakers nor the voters have had time to read.”

“There will be no federal bailout for the state of Illinois, so legislators must get this right,” Kirk said.

Solvable Situation

Illinois has the lowest credit grade among U.S. states from the three biggest ratings companies. Its bonds are the worst performers this year among the 27 states tracked by Standard & Poor’s, losing 3.13 percent through Nov. 29. That compares with a 2.26 percent decline for the $3.7 trillion municipal market, S&P data show.

“Their bonds are, quite frankly, getting lumped in with a lot of distressed credits like Puerto Rico and Detroit, and they’re nothing like either of those two,” said Robert Miller, who helps oversee $33 billion in munis, including Illinois bonds, at Wells Capital Management in Menomonee Falls, Wisconsin.

“Chicago and Illinois both have a lot going for them and are being penalized because of their inability to deal with a large, but solvable, issue,” Miller said.

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