CHICAGO - Two days into a new fiscal year without a budget in place, Illinois Gov. Rod Blagojevich yesterday announced a two-day special session of the General Assembly for next week aimed at winning passage of revenue measures that would trim about $850 million from a $2 billion deficit in the $59 billion operating budget approved by lawmakers.

"Yesterday we started another fiscal year without a state budget. Last week I told the General Assembly that I would not sign a budget bill with a $2 billion shortfall - Illinoisans must be able to trust that our checks will not bounce," he said at a news conference.

The governor's action is aimed at the state House, as the Senate did approve a series of revenue-generating measures in May when they signed off on a spending plan. The House approved the spending side of the package, but did not vote on a $16 billion pension obligation bond issue, the transfer of various funds, and a capital budget that combined would have trimmed the deficit by more than $1 billion.

Yesterday, the governor backed off his push for the pension bond issue and did not provide another idea for how to replace the $400 million it would have saved in the fiscal 2009 budget. Blagojevich called on the House to approve the Illinois Works capital budget that would free up about $320 million in the operating budget and the transfer of $530 million from various non-general fund accounts.

The governor last week outlined a series of potential cuts as he urged the House to return on its own. Democratic House Speaker Michael Madigan's spokesman Steve Brown said there's not sufficient support for the various measures to win passage. The already strained relationship between the two Democrats has grown only more hostile in recent months.

Yesterday, Brown said Madigan would "go to Springfield next week" as requested by the governor, but added there was "no way of knowing what happens after that."

The special session is set for July 9 and 10th. The governor said if the House fails to approve the needed-revenue measures during the first day, he would issue a proclamation on the secondenacting the cuts.

"I will not take those actions lightly, and will only act when it becomes abundantly clear that the House can't or won't act responsibly on its own," said Blagojevich.

Without a budget in place, Comptroller Dan Hynes has warned that bill payment could be delayed along with employee paychecks. Because of a drafting error in the budget, about 39 capital projects are being idled, but the governor said that would be fixed during the session next week.

Support is strong for a capital budget, but differences remain among lawmakers on how to pay for it. The proposed capital budget relies on about $7 billion from a partial leasing of the Illinois Lottery, $800 million in upfront funds from the issuance of new gaming licenses, $7.8 billion in new general obligation borrowing, and local and federal matching dollars.

About $6.2 billion of the bonding would be repaid with recurring gaming expansion revenues and $1.6 billion from transportation-related taxes and fees. The state has lacked a major infusion of capital dollars since the $12 billion Illinois Works program approved in 1999 and congressional officials have warned that without new funding the state risks the loss of federal matching dollars.

With support for the pension borrowing plan more tenuous in the House among both Democratic and Republican members, the governor yesterday dropped his push to win its passage. The proposal calls for the restructuring of the 50-year payment schedule approved in 1995, increasing future year payments while trimming about $400 million off the fiscal 2009 payment. The infusion into the pension system of the funds raised through a new pension borrowing would help bring the funded ratio of the system up to 75% from 62%.

The current unfunded liability is $42 billion. The governor has promoted the pension plan as one that would ultimately trim 12 years off the time needed to reach a 90% funded ratio. Blagojevich said the pension plan overall would result in a savings of $34 billion in contributions.

Yesterday, Moody's Investors Service issued a special report saying it was monitoring the situation in four states - California, Illinois, Massachusetts, and Pennsylvania - that have entered new fiscal years without a budget in place. The delay is not expected to impact debt service payments, but it does have the potential to disrupt the flow of a state's payment to vendors and employees, as well as to the cities, public universities and other municipalities that receive state funds.

"Moody's views repeated delays, or those causing government shutdowns, as signs of political polarization, and for those reasons, the timing of state budget enactment can affect the ratings Moody's assigns to state issued general obligation bonds and other debt," analyst and author of the report Ted Hampton wrote.

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