But State Financial Structure Still Challenged

SPRINGFIELD, Ill. -- State Comptroller Daniel W. Hynes today released the Illinois Comprehensive Annual Financial Report for the fiscal year ending June 30, 2006. The report, which is based on generally accepted accounting principles (GAAP), shows that the state's General Fund deficit stood at $2.328 billion, a $736 million improvement from the previous year that ended with a deficit of $3.064 billion. Hynes cautioned however that the improvement, while welcome, does not significantly alter the state's overall fiscal health which is negatively impacted by the state's accrued Medicaid liabilities, long-term pension obligations and cash flow difficulties. He said that the state's backlog of unpaid bills currently exceeds $2 billion while the Budget Stabilization Fund or "Rainy Day" fund of only $276 million is depleted quickly every year. "Illinois still has a sizable deficit and will face tremendous challenges in the future just to meet these pension and Medicaid responsibilities and to pay its bills in a timely manner," Hynes said. "This problem will be compounded next year as the state resumes making mandated pension contributions of more than $600 million that had been suspended in FY 2006 and this year."

Significantly, the state's General Fund accrued liabilities, defined as bills from the fiscal year allowed to be paid from a future year's appropriations, did improve in FY 2006. Most notable was that deferrals allowed under Section 25 of the State Finance Act and associated primarily with Medicaid expenditures decreased from $2.949 billion to $2.385 billion.

Hynes, a long time critic of the use of Section 25 payments, said such expenditures allow the budget to appear artificially balanced while the state indefinitely delays hundreds of millions of dollars in payments to health care providers. Consequently, the financial stability of these providers, and of the entire Illinois health care infrastructure, is thus severely weakened.

"Today I am proposing that we take this opportunity to eliminate Section 25 expenditures entirely to more honestly deal with the real costs of the Medicaid program," Hynes said.

Recognizing that the nature of Medicaid bills must allow for a longer adjudication period than most other types of state obligations, Hynes' proposal, as embodied in HB 3397 sponsored by Rep.William "Will" Davis of Homewood and Rep. David Miller of Calumet City, would extend the end of the fiscal year for Medicaid expenditures, or what is commonly known as the lapse period, until October 31st of each year. Currently the lapse period for all other state expenditures incurred on or before June 30th ends on August 31st, while Medicaid costs incurred on or before June 30th can be paid without any calendar restriction. While the lapse period for all other bills would remain the same as current law, the establishment of a later but final date for Medicaid bills would not only impose greater discipline on state finances but would ultimately provide for timelier payments to the state's health care providers.

"This is not just about honest budgeting and more accurate financial statements that impact the state's bond rating and credit worthiness," Hynes said. "It also is about keeping faith with and sustaining thousands of health care providers on whom we have imposed this huge burden of deferred costs and what amounts to deficit financing for state government."

The report also noted that the Net Assets of Governmental Activities (defined as the amount the State has left to fund the traditional services of government after assets are used to pay liabilities) stated a deficit of $18.329 billion as of June 30, 2006, a $769.1 million increase from the June 30, 2005 deficit of $17.560 billion. A primary component of this deficit consists of Net Pension Obligations which grew from $12.036 billion at the end of FY 2005 to $14.499 billion as of June 30, 2006, an increase of $2.463 billion and coinciding with the state's partial suspension (also in effect this year) of mandated pension contributions in FY 2006. Pension obligations have grown by $4.161 billion during the past two years.