Illinois Debt Takes Toll, Study Finds

Those are the conclusions of a new examination of Illinois’ finances by the State Budget Crisis Task Force, which was released Wednesday.

The group, led by the former Federal Reserve chairman, Paul A. Volcker, and the former New York lieutenant governor, Richard Ravitch, recommended an overhaul of Illinois’ budgeting practices, to make it harder to kite money from year to year and raid special-purpose funds. It also warned that tax increases may be in store.

“It would be better for Illinois to start on a long-run path to a sustainable budget than to live beyond its means for several more years and then face a sudden, painful reckoning,” the task force said.

Illinois has the lowest credit rating of the 50 states and has America’s second-biggest public debt per capita, $9,624, including state and local borrowing. Only New York State’s debt is bigger, at $13,840 per capita. But Illinois has not been able to use much of the borrowed money to keep its roads, bridges and schools in good working order, because years of shoddy fiscal practices have taken a heavy toll, the report said.

“Illinois has been doing back flips on a high wire, without a net,” the task force said in the report, which was issued in Chicago.

The task force has been examining the finances of the states out of a concern that huge fiscal problems at the state and local level are being overlooked as the election-year debate in Washington focuses on the federal debt and deficit.

Nearly two-thirds of the Illinois state government’s $58 billion in direct debt consists of bonds the government issued to cover retirement payments for workers, including a $10 billion pension obligation bond that broke all previous records in 2003.

Yet despite all that borrowing, Illinois’ public pension system is still in tatters. In fact, its total pension shortfall is conservatively estimated at $85 billion. Recent changes that raised the retirement age for new workers and limited the pensions that future workers can earn have not reduced the existing obligations.

The task force said that further reductions in pension benefits appear inevitable, though legally difficult, because the state has promised more than it can deliver.

While many states have heavy debt burdens and unfunded pensions, the task force warned that Illinois’ problems had been building for decades and were advanced. The state was “insolvent” even before the financial crisis hit in 2008, the report said, but that was hard to detect because “budget gimmicks became a standard practice.”

During the 2001 recession, for instance, the state started issuing a type of short-term debt permissible only during emergencies, and within certain limits. But even after the recession, the emergency borrowing continued. The money was used to pay overdue bills.

The task force noted that Gov. Pat Quinn had inherited the insolvency from the previous governor, Rod R. Blagojevich, who is serving a prison sentence for corruption. The $10 billion pension obligation bond was issued on Mr. Blagojevich’s watch, and prosecutors said at his trial that he had used the transaction to raise campaign money in a pay-to-play scheme. The state paid a total $76.3 million in issuance fees, but the pension fund ended up worse off than ever, because bondholders were promised that the state would divert its pension contributions to pay their interest.

Mr. Quinn has been trying to push through some fiscal reforms, the report said, but he was running into intense opposition at nearly every turn. In August he warned that by 2016, Illinois will be paying more for public pensions than for education, and he called back the legislature for a special pension session. But lawmakers rejected his proposals.

Time appears to be running out for a relatively painless fiscal reform, the task force said. Besides a pension system in desperate shape, the government faces decreasing transfers from the federal government, the imminent expiration of a temporary state income tax increase that was enacted in 2011, and escalating state Medicaid costs.

“Retirees may lose their pensions as the funds dwindle, low-income and disabled people may lose their health care as costs escalate, and citizens and businesses seeking a stable environment may face steep and sudden tax increases,” the report said.

Illinois’ budget director, Jerry Stermer said at Wednesday’s news conference that the state had made drastic reductions in spending, which this year would be back to about the level in 2008.

“This report is required reading for every public official in Illinois,” Mr. Stermer said.