CHICAGO - Illinois is nearing a "financial tipping point," with the state facing the loss of businesses, investment, and jobs as its fiscal position has dramatically worsened over the last two years, according to an updated report released this week by a prominent Chicago-based business group.

The stinging report warns that based on its findings the state's annual structural budget imbalance has doubled and now stands at more than $8 billion, while the overall debt level - including pensions, other post-employment benefit obligations, and overdue bills - has grown to $116 billion from just over $100 billion.

"We are nearing a financial 'tipping point' where businesses and citizens in general may start to steer clear of Illinois or even to leave it in order to avoid having to bear the compounded burden of the deferred costs of the past and the normal operating costs of future years," said R. Eden Martin, president of the Civic Committee of the Commercial Club of Chicago.

The new report from a task force of the committee is a follow-up to the organization's 2006 analysis, which painted a gloomy picture of Illinois' financial future - warning it was headed towards "financial implosion" unless a series of belt-tightening and reform measures was undertaken to rein in costs.

Both then and now, the Civic Committee has pushed the state to trim pension and retiree health care benefits, bringing them in line with the private sector. The group is also urging the implementation of management initiatives such as restructuring and outsourcing some state services. It would support a tax increase only if those reforms were implemented and any tax-hike proceeds went to pay for existing obligations and not for new programs.

"Although our original report was widely praised for its frank and accurate assessment of the situation, not one of our recommendations has been seriously pursued," said W. James Farrell, the task force's chairman. "In the intervening years the situation has become dramatically worse, snowballing to the point of an immediate crisis."

Katie Ridgway, a spokeswoman for new Gov. Pat Quinn, the former lieutenant governor who inherited the mess earlier this year, said of the report: "Gov. Quinn realizes the urgency of the state's fiscal condition and is exploring a range of measures and solutions. In doing so, Gov. Quinn has reached out to many organizations, including the civic committee, and welcomes their input."

Illinois' fiscal position has dramatically deteriorated as the General Assembly enacted a budget for fiscal 2009 that was structurally imbalanced, and after former Gov. Rod Blagojevich last August gave unions a 15% four-year wage increase with no pension reforms. The nation's financial crisis and market dive have further pushed the state to the brink.

The report found that while the budget has been balanced on a "cash basis" in recent years as required under the state constitution, that assessment has not included bills that are put off until the next year, amounts borrowed, or rising Medicaid or pension funding shortfalls.

The report puts the structural operating deficit in the $59 billion budget at nearly $6 billion going into the current fiscal year. That number was boosted this year to more than $8 billion after the General Assembly passed its own budget in opposition to Blagojevich that was short more than $2 billion in revenue.

The task force pushes that number up to more than $9 billion if the state were to meet its foundation-level, or minimum funding for public school education.

The task force argues that Illinois' scheduled contribution to its pension funds of $2.8 billion in the current fiscal year is about $3 billion short of what should be contributed to cover the actuarially determined payment needed to cover liability growth plus interest on the unfunded balance.

The state is scheduled to pay $1.3 billion for retiree health care benefits, an amount about $1.1 billion short of the annual required contribution to cover growth in the unfunded OPEB liability.

Another number that is contributing to the structural deficit is the backlog of Medicaid bills that will be around $3 billion at the end of the fiscal year. The federal government will cover half and the state must pay for the other half.

Looking at the state's debt and unfunded obligations, the report warns that those commitments have risen to $116 billion. That figure includes $8.9 billion of general obligation bonds, another $9.9 billion of GO pension bonds, and $2 billion of sales-tax backed Build Illinois debt.

The figure further includes a whopping $69.7 billion unfunded pension liability, $24 billion in unfunded OPEB liabilities, and a backlog of about $1.6 billion in Medicaid bills. The $69.7 billion figure represents the Civic Committee's estimate of the liability at the close of last year. The most recent actuarial estimate put the figure at $54.4 billion for a 54.3% funded ratio.

The report acknowledges the difficulties most states are facing given the current economic climate, but sharply chastises Blagojevich and lawmakers of both parties for their "chaotic and hostile relations" that left Illinois unable to solve its fiscal mess.

"They have ducked anything that resembled a hard choice. They have managed the state's affairs to promote their own interests and political fortunes," the report says of lawmakers.

Pay-to-play allegations against the former governor posed even more distractions that kept the state from acting. Blagojevich was impeached and removed from office earlier this year following his December arrest on various pay-to-play federal charges, including the allegation that he sought to benefit from his power to name President Obama's Senate replacement.

The task force notes the impact of the state's fiscal struggles on its credit rating. Fitch Ratings downgraded Illinois to AA-minus in December. Standard & Poor's put its AA rating on negative watch. Moody's Investors Service has not acted on its Aa3 rating, but did strip the state of top short-term credit marks as it prepared to issue $1.4 billion of certificates in December.

The report was published ahead of the release of Gov. Quinn's proposed fiscal 2010 budget scheduled for March 18. Illinois Comptroller Dan Hynes recently warned that the state faces a $9 billion budget deficit based on his office's calculations.

"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.

Support is mounting among lawmakers for an income tax increase to shore up the operating budget and a gas tax hike to help pay for a capital budget.

The Civic Committee of the Commercial Club of Chicago is a nonprofit that is made up of senior executives from the region's businesses, professional firms, and universities. The committee's mission is to "improve the economic and social well being" of the region, according to its Web site. In the past it has promoted the expansion of O'Hare International Airport and Chicago Public Schools reforms.

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