CHICAGO - Illinois' budget deficit, officially pegged by the state at $800 million yesterday, could grow to $1 billion if income and sales tax revenue collections don't pick up, the state's debt manager warned.

Faced with rising unemployment, slowed consumer spending, and reduced business activity, the state first reported a shortfall earlier this fall when it announced that revenue collections for the first quarter of fiscal 2009 from July through September were $200 million below original estimates.

Yesterday, the Illinois Department of Revenue issued an even more sobering report that the state now faces an $800 million shortfall based on revenue collections for the first four months of the fiscal year.

Individual income taxes originally projected to grow by 1.1 % are down 4% from budget estimates. Corporate income taxes originally projected to grow 4.1% are down 14% and sales taxes originally projected to grow at a pace of 1.6% were down 3%. Personal income taxes would account for $330 million of the shortfall, corporate income taxes for $270 million, and sales taxes for $215 million.

Casino revenues are also now expected to fall about $100 million short of budgeted estimates and state investments are also expected to decline. If revenues take more of dive as many economists are warning, the budget shortfall in the current $59 billion fiscal 2009 could grow to more than $1 billion.

"We are looking at a negative growth situation ... in the personal income and corporate income taxes and in sales taxes," state debt manager Phil Culpepper said of the numbers during a panel discussion on state economic outlooks at The Bond Buyer's Midwest Public Finance Conference here yesterday.

The shortfall adds to a growing list of fiscal struggles facing Illinois. The state closed out the last quarter with a $1.8 billion backlog of bills compared to $1.4 billion last year, and a cash cushion of just $188 million, down $573 million from last year. Gov. Rod Blagojevich has not said how the state will handle the decline.

Fitch Ratings and Standard & Poor's rate Illinois' $25.5 billion of general obligation debt AA, with Fitch assigning a negative outlook, and Moody's Investors Service rates the state Aa3.

Gloomy sales tax predictions in Wisconsin of a possible overall 3% decline for the fiscal year "would create a tremendous hole to fill in the budget," said capital finance director Frank Hoadley. The state's budget relied on an estimated 1.5% rate of growth in all tax revenues.

Although Wisconsin closed out its last fiscal year with stronger than expected tax growth, the state could face a $3 billion deficit in its next two-year budget, officials warned this week. Preliminary estimates showed a 5% drop from the more than $1.3 billion collected last year.

State sales taxes took a sharp hit, falling by 6% over the summer, while corporate income taxes fell about 16% compared to last year. Officials expect to have a more accurate projection of the possible deficit when budget requests are released Nov. 20.

Wisconsin's $5.8 billion of GO debt is rated AA by Standard & Poor's, which recently upgraded the credit, AA-minus by Fitch, and Aa3 with a negative outlook from Moody's.

Both Hoadley and Illinois' Culpepper discussed the market's impact on debt management at the conference.

Illinois is planning a roughly $100 million competitive GO sale in December. While Culpepper said current market conditions favor negotiated transactions, the state is hamstrung by several restrictions, including debt reforms approved in 2004 that require 25% of debt issued in any fiscal year be done competitively.

Wisconsin has roughly $250 million of new-money GO bonds and $175 million of clean-water revenue bonds to sell in the coming months. Hoadley said the state during normal market conditions would sell them in January. Given the ongoing turmoil, it's now likely he will break up the issues into smaller deals because of greater market acceptance for smaller transactions, and he will hit the market with some of the issues before the end of the year.

Hoadley said his office, with the help of its financial advisers and several bankers he asked for input, would be ready to price the long-planned restructuring of $1.4 billion of outstanding tobacco securitization bonds within the next few weeks, but he has "not seen the market capacity" for such as large deal. The current budget that runs through June 30 relies on $300 million from the deal.

Standard & Poor's analyst James Wiemken called states' economic struggles "real" and "painful." If tradition holds true, the Midwest should escape the harshest effects of the recession, but Wiemken also warned that the Midwest may also be slower to recover.

Analysts will be watching for the impact of deficits on states' liquidity and that could result in credit action. Absent liquidity issues, analysts will wait to review state's plans for balancing their budgets with an eye to how reliant they are on one-time revenue measures.

Wiemken, noting that states have successfully navigated past recessions, said: "They have a fighting chance if they are willing and able to make the hard choices."

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