(Adds Chicago dateline, details on pension funding shortfall, pension reform bill, recent court ruling)
CHICAGO, July 11 (Reuters) - Fitch Ratings on Friday downgraded Cook County's general obligation rating to A-plus from AA-minus, citing challenges Illinois' biggest county faces as it attempts to shore up its "severely underfunded" public pensions.
The county, which includes the city of Chicago, ended fiscal 2013 with an unfunded pension liability of $5.3 billion, while the funded ratio improved to "a still weak" 61.5 percent from 58.5 percent in fiscal 2012 largely due to high investment returns, Fitch said in a report.
"Meaningful improvement would require action by the state legislature, which is not expected to be back in session until the fall at the earliest, and possibly not until January 2015," Fitch said.
Legislation to reform retirement benefits and require Cook County employees to make bigger pension contributions passed the Illinois Senate but was not taken up by the House in the spring legislative session, which ended May 31.
Meanwhile, challenges to public sector pension changes got a boost last week from the Illinois Supreme Court, which extended constitutional protection to retiree health care benefits. The ruling was seen as having implications for recent pension reform laws affecting retirements systems for the state and for Chicago.
Fitch placed a negative outlook on Cook County's A-plus rating, noting that "inability to implement an affordable plan to shore up long-term pension funding would likely lead to a downgrade."
The one-notch downgrade affects about $3.6 billion of outstanding bonds.
(Reporting by Karen Pierog and Abinaya Vijayaraghavan; Editing by Joyjeet Das and James Dalgleish)