CHICAGO - Illinois faces a record $9 billion budget deficit - a figure that poses a "formidable and unprecedented challenge" as new Gov. Pat Quinn seeks to craft a balanced spending plan for the next fiscal year, state Comptroller Dan Hynes warned in a special report released yesterday.

The news startled some as the figure is nearly double the $5 billion number lawmakers had placed the deficit at over the last week. Just a couple weeks ago, former Gov. Rod Blagojevich's office stood by its estimate of a combined deficit in the current fiscal year that ends June 30 and the next of $2.5 billion.

"Faced with a record $8.95 billion deficit for fiscal year 2010, Illinois now stands at the precipice of the worst fiscal crisis in the state's history," Hynes warned in the report. "If the recession is prolonged beyond this summer and-or revenues erode further, the state's fiscal situation will deteriorate even more than the bleak assessment presented here."

Hynes' office authored the report to provide the new governor with a clearer assessment of the state's fiscal situation. He presented it yesterday to Quinn, the state's former lieutenant governor who replaced Blagojevich last Thursday after the Senate removed him from office.

Hynes laid the blame for the state's fiscal crisis on a growing structural imbalance, an unbalanced fiscal 2009 budget that was $1 billion in the red even before revenues were revised downward, pension fund losses, growing Medicaid costs, and the recession.

Based on congressional estimates, Illinois stands to gain about $3 billion from the proposed stimulus that could go to help reduce the deficit, leaving a $6 billion hole to plug. The numbers however do not reflect any growth in existing appropriations with the exception of an additional $2 billion for Medicaid and $1.3 billion in higher pension payments.

The required pension payment is $500 million more than previously planned because of market losses.

"Any diversion form mandated contribution levels will only exacerbate the system's funding problems," Hynes warned.

The Illinois Commission on Government Forecasting and Accountability puts the state's unfunded pension liability at $54.4 billion, up $12 billion from the previous year, for a 54.3% funded ratio. The state also has a $24 billion unfunded liability for retiree health care benefits. The adoption of a long-term funding solution for that burden will likely remain on the back burner given the budget deficit and growing pension fund crisis.

Tax collections into the new fiscal year look dismal with income taxes remaining stagnant and declines in sales, gaming, and inheritance taxes expected to continue. The state must use $975 million in the current budget to cover fiscal 2008 bills, a practice it has long engaged in known as lapse period spending. It will carry a $4.3 billion deficit in its current $59 billion all-funds budget into the next fiscal year and increased costs and a continued slide in revenues will drive the deficit up to $8.9 billion.

The state's cash-flow situation also remains precarious. The report warns that Illinois will close out the fiscal year with a backlog of $4.5 billion of unpaid bills. "Without a major infusion of cash from borrowing or another source, the state will be virtually insolvent," it said.

Illinois in December issued $1.4 billion of certificates to bring down a similar backlog, but it is again mounting as revenues are diverted to repay the notes before the end of the fiscal year.

Quinn, a Democrat, has left all options - including an income tax increase - on the table to address the deficit as he crafts a budget that is to be released on March 18. So far he is sticking with Blagojevich budget director Ginger Ostro and he has consulted with former budget director John Filan, who is now the head of the Illinois Finance Authority.

An income tax hike might find Democratic support, but Republicans have said they would oppose it. Democrats hold a majority in both the Senate and House. Lawmakers are also bracing for deep cuts.

"We simply can't assume that everything will be solved with a tax increase," said assistant Senate majority leader Jeff Schoenberg, D-Evanston.

Quinn has spent recent days meeting with Chicago Mayor Richard Daley, legislative leaders, and other state officials to present a united front in addressing economic problems. All had strained relationships with the former governor. Quinn also traveled to the nation's capitol to meet with President Obama and the Illinois congressional delegation to discuss the stimulus package.

Quinn is seeking to show that his predecessor's removal will end the gridlock that overtook the state capitol in recent years, killing numerous capital budget proposals and resulting in a six-year drought in new funding. Quinn said this week he wants a capital budget approved by April.

Senate President John Cullerton, D-Chicago, and House Speaker Michael Madigan, D-Chicago, have floated the idea of increases in the state's motor fuel tax and vehicle fees as revenue streams to support a capital budget. An eight-cent increase in the 19-cent motor fuel tax could generate $500 million annually to repay debt for a $5.9 billion transportation package, according to a House proposal.

Rating agencies are watching for how the state resolves its budget crisis. Fitch Ratings downgraded the state to AA-minus in December. Standard & Poor's put the state's AA rating on negative watch. Moody's Investors Service has not acted on the state's Aa3 rating, but did strip it of top short-term credit marks.

Standard & Poor's analyst John Kenward said no credit action was expected based solely on the size of the deficit. "It is quite daunting given the percentage that it represents of their budget. The governor and the Legislature have their work cut out for them," he said.

Blagojevich was convicted of abusing his power during an impeachment trial last week. Efforts to remove him began after he refused to resign following his December arrest on federal corruption charges, including the allegation that he tried to profit in his selection of a Senate replacement for Obama.

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