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Illinois budget fix: Just don't pay the bills

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

Halfway through its current fiscal year, still without a budget and locked in a political stalemate with no end in sight, Illinois has come up with an effective way to close its widening budget gap.

Just don't pay the bills.

As Republican Gov. Bruce Rauner Wednesday prepared to deliver his annual state of the state speech to a legislature controlled by Democrats, there was little sign that a long-running, fiercely fought budget battle is any closer to resolution.

The state's budget for the current fiscal year should have taken effect July 1, but Rauner rejected the original plan offered by Democratic lawmakers. Instead, he has held out for a budget deal that includes reforms such as curbing union powers, setting term limits for lawmakers and cutting costs for businesses.

Many states, meanwhile, are already at work on next year's budget. (Pennsylvania is the only other state still operating without a completed budget.)

The Illinois budget impasse is further complicated by a wide shortfall in revenues needed to pay for the roughly $34 billion in spending approved in last year's budget. That shortfall amounts to about $4 billion, or 12 percent of state spending; a series of tax cuts that took effect a year ago have cut revenues by about $3.6 billion, 20 percent, through June 30, Moody's estimates.

Without a formal budget, Illinois has been limping along by extending parts of last year's spending plan, settling on piecemeal appropriations and battling out the impasse in the courts.

That's meant tapping special funds to pay lottery winners and scraping together money to keep 911 call centers running.

Read MoreHere's your share of state pension shortfalls

Other agencies are still waiting for funds to stay afloat.

So far this fiscal year, Moody's estimates that Illinois has accumulated more than $6 billion in unpaid spending, leaving schools, health-care agencies, local transit agencies and other service providers at risk of running out of cash.

Private agencies are also feeling the pinch. This month, Lutheran Social Services, the state's largest private social services agency, said was shutting down 30 programs serving some 4,700 people because of the funding impasse.

President and CEO Mark Stutrud said the agency will lay off 750 employees, about 43 percent of its staff, according to the Associated Press.

"We know this will impact clients, their families, our employees and communities throughout Illinois," Stutrud said in a statement. "We made these choices with a long-term view of the organization and its mission, and ultimately the ability to continue serving people."

Some $1.3 billion in funding for state elementary and secondary schools is on hold, according to Moody's. Faced with a $1.1 billion deficit, the Chicago public school system laid off more than 200 administrators and faces further layoffs this year.

The state's public universities are making cuts, and some community colleges are resorting to tuition hikes to make up for the money they're not collecting from the state.

It remains to be seen how long Illinois can defer making payments already approved in past years' budgets. Despite having a balanced budget amendment, Moody's said, Illinois state law allows for the government to defer some expenses from one fiscal year into the next year's budget.

That's allowed lawmakers to roll over deficits, creating a growing payment backlog that now represents about 20 percent of total spending, according to Moody's.

Those figures don't include a much bigger liability for unfunded pension.

That liability amounts to roughly $112 billion — roughly a quarter of the state's gross domestic product and nearly three times the state's annual revenues.

But while it's a "clear indicator of weak liquidity and governance," it doesn't pose an immediate threat to holders of the state's $27 billion in general obligation bonds, according to the rating agency. That's because state law also requires that the state make those interest payments, and because the state has a cash cushion of about $9 billion.

Still, if the state can't get its fiscal act together, that cash hoard could be exhausted. Unless it begins spending in line with revenues, Moody's estimates that the state's payment backlog will swell to $25 billion — about two-thirds of overall spending — by the end of fiscal 2019.