By Karen Pierog
SPRINGFIELD, Illinois (Reuters) - Illinois Governor Pat Quinn will call for cuts to escalating pension and Medicaid costs in his budget address on Wednesday to stop the two programs From devouring more of the cash-strapped state's general funds budget, top officials in his office said on Tuesday.
The state's fiscal 2013 pension payment will hit nearly $5.25 billion or 15 percent of projected revenue. That is more than three times the $1.7 billion the state budgeted in fiscal 2008, when pensions accounted for only 6 percent of revenue.
"We dug ourselves a hole deeper and deeper every year," said Jerry Stermer, Quinn's senior advisor.
He noted that $4.1 billion or 78 percent of the fiscal 2013 payment was for pension costs incurred by local school districts and state universities - areas that may be explored for reducing the state's payment.
Illinois's unfunded public pension liability of $83 billion, along with escalating costs for Medicaid, the health care program for the poor funded jointly by states and the federal government, have been major factors eroding the state's finances.
The Civic Federation, a Chicago-based government watchdog, predicted last month the state faced a "financial disaster" if it failed to rein in rising pension and Medicaid costs, projecting an increase in the state's bill backlog to $35 billion by the end of fiscal 2017.
As for Medicaid, the Democratic governor's $33.7 billion general funds budget aims to reduce spending by $2.7 billion. Without fundamental changes to the program, Stermer warned that deferred Medicaid bills would mushroom in future fiscal years, resulting in "a recipe for collapse of the Medicaid program."
Moody's Investors Service cited inaction on pensions and unpaid bills last month when it cut the state's credit rating to A2, the lowest rating among the states it rates.
Illinois legislative leaders have sought to push through changes to the pension system for current employees, with new hires already required to contribute more while receiving less.
David Vaught, Illinois' budget director, said the rest of the state budget for the fiscal year that begins July 1 will be squeezed as revenue is forecast to rise by about $720 million, while the pension payment will increase by more than $1 billion.
"So there's no new money for anything else. That's the squeeze," he said.
As a result, Quinn's budget calls for closing several state facilities, including jails, mental health hospitals, administrative offices, garages and police communication centers as part of a 9 percent general fund spending cut that hits most state agencies, Vaught said. A notable exception was education, which has a slight increase in the budget.
The proposed spending plan projects $163 million of additional, unappropriated revenue that could be used to pay down the state's approximately $8 billion backlog of unpaid bills, the officials said.
The governor will also be asking the Democrat-controlled General Assembly for new bond authorization, including $4.3 billion of general obligation bonds for the state's ongoing capital improvement program, Vaught said. In addition, Quinn is eyeing another $3 billion of bonds for schools, water projects, state facilities and universities if funding sources can be found, he added.
One issue Quinn is not overtly pushing in his latest budget is his plan to sell bonds to ease the huge backlog of unpaid bills. That plan, which was a major component of his fiscal 2012 budget proposal, failed to win over legislators.
Quinn's vision for the state also included measures that would hurt revenue. He has proposed eliminating the state's natural gas utility tax that raises about $160 million annually, and recommended tax credits for families with children and for businesses that hire military veterans. Money to pay for the tax credits would come from closing tax loopholes, officials said.
(Reporting By Karen Pierog, additional reporting by Andrew Stern; Editing by Tim Gaynor)