CHICAGO — Illinois faces increasing pressure on liquidity as a short-term borrowing is coming due, putting the state on pace to close out the fiscal year on June 30 with a $5.5 billion backlog of bills, Comptroller Daniel Hynes warned in a recent report.
The state closed out the third quarter of fiscal 2010 on March 31 owing $4.5 billion in bills, up from $3.4 billion a year earlier. The list of bills includes vouchers and transfer requests submitted in the first quarter that have been pushed back as the state meets its priority payments, including debt service.
Last month, Hynes' office set aside $506 million toward repayment of $2.25 billion of general obligation cash-flow certificates issued last year. The remaining $1.75 billion plus interest must be set aside by June 10, the analysis reported. The state also has had to make other priority payments, such as increased Medicaid disbursements, in order to qualify for federal stimulus funds.
"Major factors in the decline of the cash-flow position include continued weakness in the state's economy-driven revenues, a structural imbalance in the enacted fiscal year 2010 budget, and the state's inability to address the deficit in the fiscal year 2009 budget resulting in over $3.9 billion in fiscal year 2010 revenues expended for last year's bills," according to the office of the comptroller's quarterly report on the state's fiscal condition.
The state bought some relief in January with a $3.5 billion, five-year GO sale to fund its pension obligations in fiscal 2010 as the general fund was reimbursed for already-made pension payments. However, Illinois must start setting aside funds in the coming months to begin repaying that issue, adding to its looming challenges.
Gov. Pat Quinn's budget office said the report underscores the need for legislative action on proposed budget cuts and an income tax increase. "Now is the time for immediate and decisive action and we are hoping for continued assistance from the General Assembly to help the state return to sound financial footing," said budget spokeswoman Kelly Kraft.
The pension bond issue and federal stimulus funds helped fuel a 7.9% increase in base revenues of nearly $21 billion in the first three quarters of the year. Those one-time revenues only masked the more grim numbers that show individual income taxes declined by 8.1% or $536 million, and sales taxes were down $506 million, a 9.8% drop. Meanwhile, corporate income taxes declined by $112 million, an 11.4% drop compared to a year earlier.
Hynes, who lost his bid against Quinn for the Democratic nomination for governor, warned that the backlog will grow to $5.5 billion by the end of the fiscal year "absent any other developments."
The state's service providers, local governments, and schools face longer delays for receiving state funds. Five state universities were downgraded recently by Moody's Investors Service due to the pressure posed by the payment delays.
"A continued increase in the backlog of unpaid bills and the state's inability to pay those bills will lead to further erosion of the state service infrastructure," Hynes' report said. "There appear to be limited options left for the remainder of this fiscal year to substantially mitigate these conditions and the outlook for fiscal year 2011 is even more ominous."
Raters are watching Illinois' liquidity closely as the ongoing strain, along with a looming $13 billion budget deficit, drove recent negative rating action.
Fitch Ratings downgraded the state's $23.4 billion of GO bonds to A-minus and left the rating on negative watch as it awaits the results of the current legislative session and whether lawmakers will turn to one-time measures or enact more lasting solutions to the budget problems.
Standard & Poor's affirmed its A-plus, but placed it on negative watch. Moody's affirmed its A2 rating and negative outlook.
Quinn's proposed $52 billion fiscal 2011 budget includes $2.4 billion in cuts and $4.7 billion in some form of deficit borrowing, while leaving nearly $6 billion of unpaid bills. A 1% income tax hike could generate up to $3 billion that would help reduce the amount of unpaid bills and restore $1.3 billion in education cuts.