Volcker group to say Illinois budget is unsustainable

Karen Pierog

CHICAGO, Oct 23 (Reuters) - Illinois has dug itself into such a huge financial hole that it may not be able to provide basic services to residents or meet employee benefit obligations, according to a national task force that is due to release a report about the state's finances.

The report, prepared by the nonpartisan State Budget Crisis Task Force and expected on Wednesday, will also say that the state's fiscal stress is a ``serious drag'' on its economic performance, a statement from the task force said. The group is led by former Federal Reserve Chairman Paul Volcker and former New York Lieutenant Governor Richard Ravitch.

The statement was due on Wednesday with the report, but it was mistakenly emailed to reporters a day early.

``Illinois's budget is not fiscally sustainable,'' Ravitch said in the statement. ``Despite recent progress and difficult choices, it is still in a deep hole.''

The report is due to be released at a press conference in Chicago on Wednesday.

Ravitch said in the statement that Illinois ``cannot simultaneously continue current services, keep taxes at current levels, provide all promised benefits, and make needed investments in education and infrastructure.''

The task force highlighted the state's unfunded pension liability and high debt per capita compared with other states; about $8 billion in unpaid bills that were pushed into fiscal 2013; high tax rates levied on narrow taxable bases; a reliance on federal aid; increasingly stressed local governments throughout the state.

The statement said the report would call for tax and pension reform. Other recommendations will include working with the federal government to control Medicaid costs, maintaining a ``meaningful'' rainy day fund, adopting a ``nonpolitical'' revenue forecasting process and monitoring local governments' finances.

Ravitch and Volcker formed the task force in June 2011 in response to concerns over persistent state budget imbalances.

A July 2012 task force report focusing on California, Illinois, New Jersey, New York, Texas and Virginia found that rising health care and pension costs, along with volatile tax revenue and federal budget cuts, threatened state budget stability.

Efforts to reduce Illinois' $83 billion unfunded pension liability failed to gain traction in the legislature this year but could be resurrected after the Nov. 6 election.

The lack of pension reform and a structural budget deficit have weighed on Illinois' credit ratings, which at A from Standard & Poor's Rating Services and A2 from Moody's Investors Service are the lowest among states.

Illinois is paying a big price to sell its debt in the $3.7 billion U.S. municipal market. Its so-called credit spread over Municipal Market Data's benchmark triple-A scale for 10-year debt was 150 basis points in the latest week, more than double California's credit spread and that of other large debt issuers tracked by MMD.