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Illinois governor's budget relies on big bond sale

By Karen Pierog

SPRINGFIELD, Illinois (Reuters) - Illinois Governor Pat Quinn on Wednesday proposed a $52.7 billion budget that even his fellow Democrats said needs trimming, and which relies on selling more debt to pay a pile of overdue bills.

Steep temporary tax increases enacted last month failed to completely repair the state's finances, but Quinn challenged opponents of his proposed $8.75 billion bond sale to identify programs to eliminate so he can pay some $10 billion in leftover 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," said Quinn, who won his first full term in November.

Of the many states struggling with multibillion dollar budget gaps due to the recession, Illinois is among those in the worst fiscal mess. Some put the nationwide problem at more than $100 billion for the next fiscal year, which for most states starts this summer.

Recently, prices on municipal bonds have risen as investors shrugged off worries about wobbly state and local government finances. But the $2.8 trillion municipal bond market has seen frequent sell-offs in recent months as investors dump their holdings over concerns that fiscal conditions will worsen.

Quinn's proposed fiscal 2012 budget, which includes $35.4 billion of spending for essential operations, was immediately criticized by lawmakers as too light on spending cuts.

Democratic House Speaker Mike Madigan said in a televised interview that Quinn's budget included $720 million in savings that will depend on changes to state law.

"We all acknowledge that this is a terrible, terrible situation and we're trying to work our way out of it," said Madigan, who supports the idea of borrowing to pay bills.

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 said Illinois' bill backlog and growing debt burden could lead to a rating downgrade.

While Quinn outlined several areas where he wants to reduce spending -- including a sizable $552 million cut in the Medicaid health care program for the poor -- legislative leaders from both parties said he was not aggressive enough.

UNAFFORDABLE SPENDING

Republicans, who vehemently opposed the tax hike and are resisting taking on more debt, said part of the bond sale would be used by Quinn to lift spending $1.7 billion from a year earlier. Republican votes are needed to approve the bond sale.

"Some of that borrowing is actually used to support a level of spending we can't afford," Senate Republican leader Christine Radogno told Reuters.

She said Quinn failed to address "the real drivers" of the state's deficit: employee pensions and retiree health care.

To resolve the pension problem, legislators are likely to weigh some combination of reduced pension benefits and higher contributions by workers and retirees.

"I think people should be worried about Illinois because we haven't taken the bold kind of action we need to take," Radogno said.

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.

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.

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.

(Editing by Andrew Stern and Jackie Frank)

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