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Illinois governor's budget relies on big bond sale

SPRINGFIELD, Illinois (Reuters) – Illinois Governor Pat Quinn on Wednesday proposed a budget that largely depends on selling more debt to pay off a pile of bills that have left Illinois' finances the weakest among U.S. states.

Tax increases Illinois enacted last month did not solve the state's budget dilemma, and Quinn suggested that opponents of his proposed $8.75 billion bond sale identify programs to eliminate to free up money to pay the state's overdue bills.

"Even with our new (tax) revenues, if we do not restructure our debt it will take us decades for us to return to the prompt payment cycle of a fiscally responsible government," the Democratic governor told the General Assembly.

"Billions of dollars of existing bills will not go away by magic," Quinn said.

Republicans, who voted against the tax hikes and oppose the borrowing, are the minority party but their votes are needed for the three-fifths majority required for general obligation bond sales.

Illinois is currently facing roughly $10 billion in bills for state services, corporate tax refunds, and group health insurance payments, while it also has to pay back money it borrowed from other state funds, state officials said.

The $52.7 billion fiscal 2012 budget, which includes nearly $35.4 billion of spending for essential operations, would be balanced if lawmakers agree to the bond issue, they said.

Without money from the 15-year bonds, the state would continue its cycle of pushing expenses incurred in one fiscal year into the next, exacerbating its structural budget deficit as bigger and bigger chunks of revenue from the new fiscal year would not be available to pay for current services.

Illinois' finances were cited this month as the weakest among U.S. states in a Reuters poll of Wall Street professionals and investors who were asked about the $2.8 trillion municipal bond market.

TAX HIKE STEAMS REPUBLICANS

The usually tame market has been shaken by predictions that some local governments may default on debt and by suggestions that states be allowed to file for bankruptcy, an option that is currently not available

Illinois, the fifth-most populous state, was the second largest issuer of debt in 2010 behind much-larger California, which shares with Illinois an A1 bond rating that is the lowest for states from Moody's Investors Service.

The rating agency has cited Illinois' bill backlog and growing debt burden as factors that could lead to a rating downgrade.

Illinois pushed a record $6 billion in fiscal 2010 bills into the current fiscal year, said Budget Director David Vaught, adding that all those bills were paid by the end of December.

Republicans are still steaming over last month's approval along party lines of a 67 percent four-year increase in the individual income tax rate and a 46 percent temporary hike in the corporate tax rate. While the tax increase is expected to generate about $6.8 billion a year, the state needs more than that amount of cash before fiscal 2011 ends on June 30 to avoid pushing a record amount of bills and other expenses into the next fiscal year.

Jack Lavin, Quinn's chief of staff, said a slice of the tax increase was set aside in the law to pay off the bonds.

Illinois tied the tax increases to restrictions on spending that limit growth to 2 percent annually through fiscal 2015. For the fiscal year that begins on July 1, general fund spending is capped at $36.8 billion and Quinn's budget at just under $35.4 billion is below the cap.

(Editing by Andrew Stern and Jackie Frank)