Illinois on track to end fiscal year owing $8 billion

CHICAGO (Reuters) - Illinois is still on track to push about $8 billion of unpaid bills and obligations incurred this fiscal year into the next year in the wake of its newly passed state budget, the state comptroller said on Thursday.

Comptroller Judy Baar Topinka said while the state legislature passed a slimmed-down budget this week, it will take some time before the cash-strapped state gets under control overdue payments to schools, hospitals, social service agencies and others.

"(Lawmakers) made some cuts. I think they still have to make some more," Topinka told Reuters. "If we can do that for a few years, we can work our way out of this situation."

The General Assembly on Monday passed a $59.1 billion all-funds budget for the fiscal year that begins July 1 which includes a $33.4 billion general fund -- about $2 billion less in general fund spending than Governor Pat Quinn proposed in February.

A package of bills that would have let Illinois issue $6.2 billion of seven-year general obligation bonds to pay bills did not muster enough support in the Senate. Topinka, State Treasurer Dan Rutherford and others had argued against borrowing, advocating instead for spending restraints.

"They stood tall and did not borrow and agreed with us and others that thought that we need to work our way out of it the same way we worked our way into it. It didn't happen overnight and it's not going to be solved overnight," Topinka, a Republican, said.

The Democratic governor, who originally proposed $8.75 billion of 15-year bonds to pay bills, was not, however, giving up on the idea of a bond sale to pay obligations.

Without the bonds, the $8 billion of fiscal 2011 bills and obligations will have to be paid off by the end of December with fiscal 2012 revenue, exacerbating the state's structural deficit.

Illinois' widening structural deficit, huge unfunded pension liability, inability to pay its bills on time, cascading bond ratings and propensity to borrow its way out of financial problems have made the state a major worry in the $2.9 trillion U.S. municipal bond market.

Topinka said revenue from a 67 percent increase in the personal income tax rate and 46 percent hike in the corporate tax rate enacted by the state in January has been absorbed by Medicaid and public pensions and was not helping to pay bills.

Meanwhile, Quinn on Wednesday expressed displeasure with funding cuts to primary and secondary public schools approved by lawmakers.

"That's no way to build a better Illinois," Quinn told reporters.

(Reporting by Karen Pierog; Editing by James Dalgleish)