02/25/2013 11:54 am ET Updated Apr 27, 2013

Illinois' Unpaid Bills Could Hit $21.7 Billion By 2018: Report

CHICAGO, Feb 25 (Reuters) - Illinois' pile of overdue bills could nearly triple to $21.7 billion in five years unless the state takes action to curb its public pension costs, a financial watchdog group reported on Monday.

"Lawmakers need to adopt a long-term mindset and restructure the unaffordable pension systems that are keeping the state in its fiscal downspin," Lawrence Msall, president of the Chicago-based Civic Federation, said in a statement.

The group's report said the amount of unpaid bills would be down from the nearly $35 billion it previously projected the state would face by fiscal 2017, largely due to cuts Illinois made last year to Medicaid, the healthcare program for the poor. But the $21.7 billion in outstanding bills owed to vendors, social service providers, hospitals and others in fiscal 2018 would be 2.8 times the $7.8 billion in forecast bills in fiscal 2013, which ends on June 30.

Illinois stands alone among states in the scope and way it has institutionalized late payment of bills as a budget-balancing tool.

Illinois also has the worst-funded state pension system at 39 percent, far below the 80 percent level considered healthy. Lawmakers in the Democrat-controlled legislature have been unable to rally around a plan that would reduce pension costs and labor unions have warned they will rely on strong protections for retirement benefits in the Illinois Constitution to fight changes.

The Civic Federation said pension costs, including annual state contributions and payments on outstanding pension bonds, could gobble up nearly a third of state-generated revenue in five years. It added that the state must also prepare for increased Medicaid costs in the future.

"We've reached a breaking point where the state will not be able to make its future pension payments without sacrificing basic government services," Msall said.

Compounding Illinois' fiscal problems is the partial expiration in 2015 of income tax rate increases the state enacted in 2011, according to the report. The forecasts assume the rate increases will expire as scheduled, and the drop in revenue combined with burgeoning pension payments is projected to result in a $4.2 billion operating deficit in fiscal 2018.

Deputy Majority House Leader Lou Lang introduced a bill last week that would make the personal income tax rate increase permanent, coupling the move with pension changes. That proposal joins other pension reform measures that the legislature is supposed to consider this year.

Credit rating agencies have cited the partial expiration of the tax increases as a negative factor for Illinois, along with the state's nearly $97 billion unfunded pension liability and structural budget deficit. Illinois has the lowest ratings among states from Standard & Poor's and Moody's Investors Service.