CHICAGO — In a stark illustration of Illinois’ deteriorating balance sheet, the state ended the first quarter of fiscal 2011 with $5.5 billion in overdue bills and faces a possible structural deficit of at least $15 billion in the next fiscal year if no action is taken, Comptroller Dan Hynes warned in his quarterly report.
The state closed out fiscal 2010 on June 30 owing $4.7 billion in bills. Another $1.7 billion of bills incurred in fiscal 2010 were submitted by an Aug. 30 deadline to bring the total level of fiscal 2010 bills to $6.4 billion. That figure represents 23% of fiscal 2010 general fund revenue.
“Nearly $6.4 billion of fiscal year 2011 revenues will be utilized for fiscal year 2010 bills,” Hynes wrote in the report, available at http://www.ioc.state.il.us/ioc-pdf/CQ_October_2010.pdf
The comptroller’s office has now received $3.5 billion in fiscal 2011 spending authorizations. At the close of September the state carried a backlog of $5.5 billion in unpaid bills, up from $2.9 billion last year.
The oldest bills date back to March and about $2 billion of overdue invoices represent fiscal 2010 liabilities. Illinois has until Dec. 31 to pay fiscal 2010 bills under emergency budget legislation Gov. Pat Quinn signed earlier this year.
The state’s record delays in paying its obligations have damaged the ratings of state universities and the Regional Transportation Authority. They have also left local school districts, social services providers, and others that rely on state funds scrambling to cover shortfalls.
Illinois has failed to keep pace with its bills as revenues remain sluggish and debt service comes due on the short-term debt and pension-related borrowing that helped prop up recent budgets amid the General Assembly’s refusal to agree to Quinn’s tax hikes and his refusal to make deeper spending cuts.
The Democratic governor faces a tough re-election battle against Republican state Sen. Bill Brady of Bloomington. Some seats in the legislature also are up for re-election next month.
In a statement, Quinn said the report shows the need for legislative support for his plans to address the budget crisis by “putting people back to work, reducing the budget by more than $3 billion, seeking assistance from the federal government, utilizing responsible borrowing, and raising revenues.” Quinn’s finance team estimates the deficit at $13 billion.
Individual income taxes for the first three months of the fiscal year increased by 2.6%, or $49 million, and corporate income taxes grew by 2.6%, or $24 million. The report cautioned that the individual income-tax growth rate was bolstered by a change in funding levels in a refund account; absent that change the growth rate was only 1.5%.
Sales taxes dipped slightly. All other tax collections were up 3.8% or $27 million.
The state’s balance sheet benefitted from several one-shot infusions of cash. Illinois issued $1.3 billion of cash-flow certificates in July and borrowed $263 million from surpluses in non-general fund accounts. The budget relies on $1 billion in such transfers.
To retire the fiscal 2010 bills by the end of the year, Hynes warned that the state must complete its up to $1.75 billion tobacco bond sale because the budget relies on at least $1.2 billion from the deal. Illinois recently named a finance team for the transaction. The state also must make additional interfund transfers and collect additional revenue from a tax amnesty program.
“A significant failure of any of these sources will place remaining fiscal year 2010 obligations in jeopardy,” Hynes warned. “This would create a scenario in which unsatisfied payees could be forced to seek legal and judicial remedies to obtain payments in amounts unprecedented in the state’s history.”
The comptroller said barring any major changes, the state’s liquidity crisis will continue through the fiscal year and Illinois could end the year with an even larger bill backlog of $8 billion as additional debt service comes due. That number could rise if no action is taken to address a $3.7 billion pension payment.
Quinn is hopeful lawmakers will agree after the election to issue bonds to cover the fiscal 2011 payment.
However, Hynes warned: “The structural imbalance in the current budget, combined with higher debt service costs and the loss of federal stimulus revenues, creates the very real possibility that the governor and General Assembly will face a working deficit of $15 billion or more when the fiscal year 2012 budget is crafted early next year.”
The state’s ongoing struggles and liquidity and budget crisis have driven a round of rating downgrades. Moody’s Investors Service last month warned Illinois that its A1 general obligation rating is at risk of a downgrade due to escalating strains from massive pension obligations, reliance on one-times revenues, and an increasing debt load amid a fragile economic recovery.
Moody’s revised its outlook on the state’s $25 billion of GOs and other related debt to negative from stable. A downgrade would give Illinois the distinction of holding the lowest Moody’s rating among states. California is the only other state currently rated at A1.
Fitch Ratings assigns an A and a negative outlook to the state’s GO debt and Standard & Poor’s rates the credit A-plus, but has it on negative watch.