Illinois' epic budget fail sets a dubious record

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Demonstrators, protesting the state of Illinois budget stalemate, rally in the Loop before marching to the Chicago Board of Trade Building where they bolcked all of the entrances to the building on November 2, 2015 in Chicago, Illinois.

OK, Illinois, it's your turn.

Following this week's $30 billion budget deal in Pennsylvania, Illinois became the last state without a tax and spending plan for the fiscal year that began last July.

While most states are busy planning next year's budget, Illinois now holds the dubious record for the longest budgetary foot-dragging in recent memory, according the National Conference of State Legislatures. (Until this week, Pennsylvania had tied with Kentucky, which didn't get around to approving its fiscal 2003 budget until late March of that year, according to the organization.)

Despite their spectacular fiscal fail, lawmakers in the Land of Lincoln are showing little sign of progress in breaking the deadlock, now dragging on nine months past the deadline. Since then, Republican Gov. Bruce Rauner has been holding out for a package of business incentives and changes in collective bargaining laws that a Democratic-controlled legislature wants no part of.

The impasse has already forced cuts in education and social services and produced a steadily rising stack of nearly $6.5 billion in unpaid bills. The state's controller, Leslie Munger, has estimated the backlog could top $10 billion by the time the current fiscal year ends in July. That money that will have to be made up in next year's budget, which is technically due July 1.

Read MoreIllinois budget fix: Just don't pay the bills

"The bottom line is the state cannot go bankrupt and we cannot print money," Munger told reporters last month. "Taxpayers are going to have to pay this bill."

Some of those unpaid bills include paychecks for roughly 24,000 state workers who are owed some $62 million in back pay, representing raises they were awarded in 2011. Last week, the Illinois Supreme Court ruled that because the state hasn't officially appropriated the money, the workers were out of luck.

The court also dealt Chicago officials a setback last week in a separate ruling overturning the city's plan to try to plug a gaping hole in its pension funding. Chicago has one of the largest unpaid city pension liabilities in the country — some $33 billion, or more than seven times last year's annual operating budget. The court ruled that the plan to scale back cost-of-living increases violated pension protections in the state's constitution.

Chicago is coping with its own budget crisis, which forced layoffs in city schools earlier this year and prompted the teachers union to approve a strike this Friday that could close schools for a day, forcing some 400,000 students to stay home. The union's 27,000 members have been without a contract since July. With a $1.1 billion budget deficit, the school system has been cut off from state funding because of the budget impasse.

As the state and local budget crises deepen, some Chicago residents are deciding to pack up and leave the city. According to the latest census estimates, released this month, Chicago's population shrank in the 12 months ended July 2015, the only one of the 20 largest U.S. cities to suffer a decline.

The population decline puts further pressure on the remaining taxpayers to make up the state's budget gap, which includes the widening $110 billion shortfall in funding state pensions.

Further cuts in city services could persuade others to leave, creating a longer-term decline in the Chicago's finances.

On Monday, credit rating agency Fitch cut Chicago's rating by two notches to to BBB-, one step above junk status, citing the recent court rulings.

Other credit agencies are warning of further downgrades to the Illinois' credit, already the lowest of the 50 states.

Moody's and Standard & Poor's have warned holders of bonds used to finance the state's public universities that the budget impasse could jeopardize payments on those debts. And over the long term, the ongoing fiscal follies are hurting the universities' reputation and hurt their efforts to compete for top students.

"Several public universities were already confronting enrollment declines based purely on lower numbers of graduating Illinois high school students," Moody's said in a note. "These declines will be exacerbated as some students increasingly consider more financially stable universities, either private colleges in state or alternative out of state options."

Social service agencies are also struggling to keep their doors open as the state has stopped paying them. More than 800 independent agencies are owed over $168 million in back payments from the Illinois Department of Human Services, which can't issue checks without an approved state budget.

To help serve the state's tens of thousands of homeless people, legislators in Springfield recently proposed a special measure to sustain funding for state shelters.

The bill, HB5562, would create a new $3 instant scratch state lottery ticket, with proceeds dedicated to the Illinois Homeless Shelter Revenue Fund.