CHICAGO — Illinois lawmakers should reject much of Gov. Pat Quinn’s proposed $52.7 billion fiscal 2012 budget because it leaves a $2.4 billion operating shortfall and relies too heavily on an expensive borrowing scheme to pay off billions of dollars in overdue bills, a local tax policy group recommended Monday.

“While the Civic Federation is encouraged that Gov. Quinn and the General Assembly have taken some steps to resolve the state budget crisis, we cannot support an unbalanced budget that increases appropriations despite a multibillion backlog of unpaid bills,” said Laurence Msall, president of the Civic Federation of Chicago, which tracks Illinois and local government fiscal and tax policies.

The federation released a 95-page review conducted by its Institute for Illinois’ Fiscal Sustainability of the spending plan before lawmakers. The critical report warns that the budget fails to set aside $970 million to cover anticipated income-tax refunds and lacks the revenues to support $1.45 billion in new spending, creating a $2.4 billion operating gap.

“Alarmingly, even though the state raised income taxes ­significantly this year, the new revenues would not be enough to support the governor’s budget,” Msall said. The report is available at

While Quinn has proposed slashing $1 billion in spending, the federation said more restraint is needed to balance the budget. The income tax increase enacted earlier this year is expected to raise $6 billion to $7 billion annually. At the start of the year the state faced an estimated deficit of up to $15 billion deficit going into the next budget. While the income tax hike significantly cut that figure, Illinois still has a backlog of $8 billion in bills and other obligations.

The report slams a cornerstone of the Democratic governor’s proposal — an $8.75 billion borrowing plan to pay off a backlog of overdue state bills, Medicaid payments, and employee health insurance claims. That plan has found little support among Democratic and Republican lawmakers and Quinn has since pressed lawmakers to support a smaller version.

The $8.75 billion plan would cost an additional $3.4 billion to $4 billion in interest over the proposed 15-year repayment schedule, worsening the state’s  structural fiscal woes, the report warned.

“To truly set its finances on a stable path, the state must stop pushing its current financial problems into the future,” it said.

Illinois is on pace to end the current fiscal year June 30 owing more than $8 billion in bills, Comptroller Judy Baar Topinka warned late last month. The backlog is expected to include vouchers requesting $4.5 billion in payment. When other fiscal 2011 obligations are added after their submission in the first few months of the next fiscal year, the figure rises by $3.8 billion, including $850 million in corporate tax refunds and $1.2 billion for state employee health insurance.

The federation called on lawmakers to reject spending increases and long-term borrowing to whittle down the size of the bill backlog in the coming years. The watchdog said it could support some limited borrowing to pay down bills if it is repaid before fiscal 2015, when a portion of the income tax increase expires.

The state won praise for adopting various Medicaid and budgetary reforms, for the proposed spending reductions, and for recently appropriating operating funds to cover its $4.6 billion statutory pension contribution in fiscal 2012.

Illinois issued $3.7 billion of general obligation bonds earlier this year to cover its fiscal 2011 payment and $3.5 billion last year to cover its fiscal 2010 contribution. It will pay a total of $6.2 billion, or 17% of its general fund expenditures, to cover its fiscal 2012 contribution and debt service on past pension-related borrowing. The state has cut benefits for future employees, but the federation has pressed the state to reduce non-vested benefits and increase employee contributions. Illinois holds the distinction among states of having the lowest funded ratio of 45.4% with $75.7 billion of unfunded liabilities.

Though it acknowledges the need for infrastructure investment, the group voiced its opposition to the reauthorization of $15 billion in debt-funded capital projects and new debt appropriations of $1.6 billion unless the state can show it has adequate revenues to support the borrowing and provides more detail on the capital plan.

Debt manager John Sinsheimer last week said between $2 billion and $3 billion of new GO debt could be sold in 2011 to support the ongoing capital budget, though the level of bonding depends on the resolution of a court case before the Illinois Supreme Court.

The governor’s Office of Management and Budget issued a lengthy statement pointing out areas where the federation praised the budget while defending the need to restructure overdue bills through a bond issue, and making the case for continuing the capital program.

“The budget put forth by Gov. Quinn is a balanced budget that addresses the state’s challenges and provides solutions to paying our bills, protecting jobs, and saving taxpayers money,” the statement read. “Our capital plan is putting people back to work, building roads and schools, and helping Illinois recover from the longest and deepest recession since the Great Depression.”

Lawmakers have set a May 31 adjournment date for the current spring session. While pieces of the budget have won passage in various chambers, the brunt of work remains and there is little agreement among the various factions. The General Assembly is controlled by Democrats but some GOP support is needed to reach a two-thirds majority for any new borrowing.

A new report from the Illinois Commission on Government Forecasting and Accountability said state coffers are feeling the impact of the income tax increase, with personal income tax revenues up by $585 million and corporate taxes up $98 million in April. The report echoed the federation’s position that the state must hold spending at current levels to balance its books before the 2015 sunset on a portion of the income tax increase.

After a series of downgrades, Illinois’ GO bonds are rated A1 by Moody’s Investors Service, A-plus by Standard & Poor’s, and A by Fitch Ratings.

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