CHICAGO — Illinois may make some progress in paying down its massive bill backlog in its fiscal 2014 budget, but it missed an opportunity to ease the growing strains on the state's fiscal foundation, a new report warns.

The assessment that Illinois missed opportunities to face up to its ongoing pension crisis and the looming expiration of a tax increase comes from the Civic Federation of Chicago's Institute for Illinois' Fiscal Sustainability in its review of the state's budget.

"This year was a lost opportunity as legislators failed to prepare for the extreme financial challenges everyone knows are on the immediate horizon," said federation president Laurence Msall. "We see some progress this year on the backlog of unpaid bills, but nothing to address the unresolved pension crisis or to plan for the revenue loss coming next year."

Rising pension payments and the loss of temporary tax revenue threaten the advances made in paying down the state's overdue bills, the report warned. The budget anticipates closing out the fiscal year June 30 with a backlog of $5.8 billion, down several billion from the $8.8 billion on the ledger at the close of fiscal 2012 and $6.3 billion at the end of fiscal 2013. The state has a $35.7 billion general fund.

The state made headway in bringing down the backlog by setting aside revenues in both fiscal 2013 and again this year and was aided in the effort by higher than expected income tax collections in April as tax filers sought to avoid higher federal rates taking effect on some assets.

The size of the state's bill backlog is one of several central factors in the state's credit deterioration although it's taken a backseat in credit reports to the General Assembly's failure to tackle pension reforms. Illinois' general obligation rating is the lowest among states at the A-minus and A3 level and it carries a negative outlook from all three rating agencies.

The state's pension contribution rose by nearly $1 billion in the current budget but it will do little to chip away at $95 billion of unfunded liabilities in a system just 40% funded. A legislative conference committee is currently assembling a new pension reform plan that some members believe could be acted on during the upcoming annual veto session later this month. Rating analysts have also cited as a factor the expected revenue loss from the partial expiration of an income tax increase beginning in the next budget. Some believe the tax will be extended.

The state will pay a total of $7.65 billion in fiscal 2014 toward pension-related costs when annual contributions of $6 billion to the system and $1.6 billion of debt service on past pension bonds are counted. That represents 24.3% of state-source general fund revenues, the report underscored.

"The fiscal 2014 budget does not show the fiscal discipline required by the state's perilous financial condition," the report argued. "Rather than reining in spending and using any surplus to further reduce the backlog of bills, the budget includes current year spending that exceeds the governor's recommendation by more than $350 million."

General fund spending is up $2.5 billion from fiscal 2010 levels due mostly to rising pension costs while state debt has increased by $9.2 billion to $31 billion in outstanding principal in fiscal 2014 from fiscal 2010 levels of $21.8 billion. The state will pay $47.7 billion in debt service to repay all outstanding bonds through fiscal 2039, the report noted.

In a statement, Gov. Pat Quinn praised the report and noted the administration's achievements in the current fiscal year in paying down bills and negotiating a new union contract. It did not directly address the criticisms.

"Their latest report serves as another loud and clear call for comprehensive pension reform, which is necessary to strengthen our economy, protect education from draconian budget cuts and put Illinois on sound financial footing," Quinn said.

Other challenges on the horizon include uncertainties relating to the impact on Medicaid from federal healthcare reform and a state restructuring enacted in fiscal 2013 which restricts the state in pushing off Medicaid bills as it has in the past. The budget anticipates $104 million in savings for group health insurance changes under a new union contract but those savings must still be achieved.

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