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CHICAGO, May 29 (Reuters) - Illinois' $35.7 billion fiscal 2015 budget, which could receive final legislative approval as soon as Friday, risks sinking the state's credit ratings to a level rarely visited by U.S. states.
Temporary income-tax rate hikes, passed in 2011 in the midst of one of the state's budget pinches, are set to partially expire on Jan. 1, causing an estimated $2 billion revenue decline in the upcoming fiscal year that begins July 1. And budget bills passed by the Democratic-controlled House on Tuesday and pending in the Democratic-controlled Senate keep most spending flat despite the projected revenue decline.
Governor Pat Quinn had proposed making the temporary tax rates permanent, but House Democrats could not muster enough votes to pass the extension, which Republicans opposed. The chamber also refused to enact spending cuts to account for the revenue loss.
Quinn's budget office has estimated the state would lose about $2 billion in revenue in the second half of fiscal 2015 as the personal income tax rate falls to 3.75 percent from 5 percent and the corporate rate drops to 5.25 percent from 7 percent.
The legislature's spending plan relies on one-time measures that have contributed to bond rating downgrades in the past.
"To the extent the state relies more on deferring payments in the coming year - that would be a negative factor," said Ted Hampton, an analyst at Moody's Investors Service.
Fitch Ratings also has warned against the use of one-shot revenue measures.
"Deterioration in the state's financial position, as evidenced by excessive use of non-recurring revenues or additional payment deferrals, would likely lead to a downgrade," Fitch said in an April report.
A one-notch downgrade would push Illinois' current general obligation ratings of A-minus with Standard & Poor's Ratings Services and Fitch and A3 with Moody's to the triple-B level.
Laurence Msall, president of Chicago-based Civic Federation, a government finance watchdog group, said the budget plan represents "a tremendous backsliding to bad habits that made Illinois the worst-rated state credit in the U.S."
Those habits include deferring bill payments to manage cash flow. A bigger backlog of unpaid bills would add to the state's structural budget imbalance, according to Richard Dye, an economist with the University of Illinois' Institute of Government & Public Affairs.
S&P has dropped ratings in the past to the triple-B level for only three states - California, Louisiana and Massachusetts. Moody's has rated five states - Alaska, California, Florida, Louisiana, Massachusetts, and Michigan - below the single-A level since 1973. California was the sole state Fitch has rated BBB.
Illinois also runs the risk of a credit downgrade if a pension reform law enacted in December is struck down by the state supreme court. The law is projected to save the state nearly $145 billion over 30 years, but a trial judge suspended a scheduled July 1 enactment until lawsuits brought by state unions, retirees and others are resolved.
The state has been shrinking its bill pile, which stood at $4.17 billion last month, down from $5.3 billion in April 2013, according to the governor's budget office. (Editing by David Greising and Eric Walsh)