CHICAGO — Illinois’ net assets deteriorated in fiscal 2011 by $6.3 billion, bringing its deficit in the financial reporting category of governmental activities to $43.8 billion, which is the worst among states.

The figure underscores the severity of the state’s daunting fiscal challenges as it grapples with $82.9 billion of unfunded pension liabilities and is expected to close out fiscal 2012 this month owing between $8 billion and $9 billion in bills. Both are factors in the net-asset calculation reviewed in Illinois auditor general William Holland’s audit of the state’s latest financial statements.

The state’s general fund deficit eased by $738 million between fiscal 2010 and 2011. It closed out fiscal 2011 with $8.1 billion of red ink compared to $8.8 billion in fiscal 2010.

Although the state’s net-assets deficit continued to move downward, the 2011 decline did ebb a bit from the $8.4 billion fall in value recorded in fiscal 2010. The state’s asset deficit has steadily grown. Looking back to fiscal 2003, the deficit stood at $12.8 billion, rising to $20.8 billion in fiscal 2007 and $29.5 billion in fiscal 2009.

The deficit tops all other states in the nation, according to Holland’s opinion released Thursday based on the state’s fiscal 2011 results, which are prepared by the state comptroller’s office. The deficit in the statement of net assets reflects the difference between Illinois’ liabilities and assets on an accrual basis. The figure takes into account the state’s accounts payable and debt obligations, including outstanding bonds and pension obligations.

The figures provide a wider view of a state’s overall long-term fiscal health than the snapshot provided by annual budget numbers. “Over time, increases and decreases in net assets measure whether the state’s financial position is improving or deteriorating,” the report reads.

The review shows the state’s financial position as of June 30, 2011, so they don’t reflect the impact of a $2.7 billion Medicaid restructuring or $1.3 billion that’s expected to be trimmed from the accounts payable backlog next year due to action in the legislative session that ended last month. Gov. Pat Quinn’s push for pension reforms stalled over partisan bickering, but he continues to press for action this summer.

Quinn’s office blamed the worsening asset deficit on past governors and legislators and noted the accomplishments of the 2012 legislative session. “The fiscal crisis in our state began brewing decades ago and the long list of poor financial decisions have created the challenges Illinois faces today,” said Quinn spokeswoman Kelly Kraft. “We cannot fix decades old problems over night but we can take major steps to improve our finances.”

The governor on Thursday signed legislation shifting more of the funding burden for retiree health care to recipients, a move projected to save more than $250 million annually and shave billions off the state’s other post-employment benefits unfunded liability.

Like last year, Illinois fares worse than any other state in an assessment of net assets of governmental activities. Only California with a $10.5 billion asset deficit, Connecticut with a $14 billion deficit, Massachusetts with a $22.8 billion deficit, and New Jersey with a $33.4 billion deficit joined Illinois in the red.

Texas enjoys the largest surplus at $97.3 billion. The auditor compiled the information from the fiscal 2011 comprehensive annual financial reports of each state with the exception of New Mexico and South Dakota, which wasn’t available in time for the review.

In Illinois, Holland’s audit found that the state’s current financial reporting process does not allow for the preparation of a complete and accurate CAFR in a timely manner, in part because of delays in reporting by state agencies. “The lack of timely financial reporting limits effective oversight of state finances, adversely affects the state’s bond rating, and jeopardizes federal funding,” the audit found.

The audit noted that Quinn’s office and Comptroller Judy Baar Topinka’s office said they were working together to improve reporting standards and lawmakers passed a measure creating an accounting standards board.

Holland’s report came one day after a conservative Illinois policy group released an assessment of the pension and retiree health care obligations of the state and local governments, putting the total price tag on those debts of $203 billion.

The figure includes the state’s $82.9 billion of unfunded pension liabilities, $15.5 billion of pension borrowing, and $54.2 billion of state OPEB liabilities. At the local government level, municipalities have $38.2 billion in unfunded pension obligations, $10.7 billion of health care liabilities, and $1.9 billion of pension-related debt, according to the Illinois Policy Institute.

“This is more than $41,000 in retirement debt for every Illinois household,” the institute’s report read.

The group called for pension reforms that include moving towards 401(k) contribution plans, reducing cost-of-living increases for current retirees, and requiring retirees to cover most of their health care premium costs. The group also endorsed ending state payments to cover teacher pensions for local districts and public colleges, a cost shift that stalled state pension reforms.

“The only way to rescue the finances of state and local governments is to dramatically reform the structure, incentives and accountability within government retirement systems,” the institute said.

Moody’s Investors Service rates Illinois A2 with a stable outlook, and Fitch Ratings assigns an equivalent A and stable outlook. Standard & Poor’s rates the state A-plus but assigns a negative outlook and has warned it will complete its review on the outlook this year based on an assessment of the enacted budget and action, if any, on pension reforms.

Quinn and lawmakers emerged from a meeting Thursday aimed at resolving differences on pension reforms, but they failed to reach agreement and said they would meet again late next month.

Topinka issued a statement on the CAFR, saying: “It provides yet another cautionary note that we need to rein in spending and address the growing costs that are devouring the state budget. Positive steps were taken this year toward getting our financial house in order, but we clearly still have a long way to go to fully clean up this colossal mess.”

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.