How Bad Is the Crisis in Illinois? It Has $14.6 -2-

By Shibani Mahtani and Douglas Belkin Features Dow Jones Newswires

SPRINGFIELD, Ill. -- This is what happens when a major American state lets its bills stack up for two years.

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Hospitals, doctors and dentists don't get paid for hundreds of millions of dollars of patient care. Social-service agencies help fewer people. Public universities and the towns that surround them suffer. The state's bond rating falls to near junk status. People move out.

A standoff in Illinois between Republican Governor Bruce Rauner and Democratic Speaker of the House Michael Madigan over spending and term limits has left Illinois without a budget for two years. State workers and some others are still getting paid because of court orders and other stopgap measures, but bills for many others are piling up.

The unpaid backlog is now $14.6 billion and growing. Illinois is even late paying its utilities bills to Springfield, its own capital city. On July 1, the beginning of the next fiscal year, billions of dollars in road projects are scheduled to grind to a halt.

"Right now, our state is in real crisis," said Gov. Rauner last week, on the eve of a special legislative session where lawmakers are trying to hammer out an agreement before the state enters its third budgetless year.

Susan Mendoza, the state's Democratic comptroller, is in charge of doling out limited funds to organizations demanding payment -- a job she likens to handing out crumbs to starving children. She predicted unpaid bills will soon top $16 billion. "It is almost hard to say those numbers out loud because they seem so insane, but that's where we are right now, " she says.

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Any solution to the state's dismal finances will need a three-fifths legislative majority to pass. Looming behind the fiscal train wreck are an estimated $250 billion in unfunded pension liabilities, the worst in the nation, according to Moody's Investors Service. S&P Global Ratings has warned that it could lower the state's rating to junk as early as this week if it doesn't pass a budget.

The Republican draft budget includes a temporary income-tax increase. Gov. Rauner has also pushed for spending cuts in areas including state pension benefits, which are protected under the state constitution, and social services. He also wants to freeze property taxes and ease workers-compensation protections to attract new businesses.

Democrats, who are completing their own spending plan, complain that some provisions in the Republican plan, such as changes to workers-compensation insurance and a local property-tax freeze, are outside the scope of the budget.

The governor's spokeswoman says mismanagement of the state's finances predated his term, and that the governor is working "to find consensus on a budget that is truly balanced and...will ensure Illinois thrives in the long-run."

A spokesman for Mr. Madigan, the house speaker, says a compromise has been hard to broker because the two men's visions on how to fix the state are so far apart.

Illinois remains the business center of the Midwest with numerous Fortune 500 companies based in and around Chicago, major rail infrastructure and one of the nation's busiest airports. That hasn't stopped the deadlock from rippling through towns from Rock Island on the Mississippi River to Charleston in central Illinois. Hospitals and doctors are feeling the brunt as the state delays Medicaid payments and insurance payments for state employees.

Peoria-based OSF Healthcare, a network with 10 Illinois hospitals, is owed about $115 million for bills over four months old, the equivalent of 18 days of operating expenses, says Chief Financial Officer Michael Allen. "We have to be cautious about our future," he says. "There's just no end in sight."

The state owes Illinois dentists $225 million, and some of those bills go back 23 months, according to the Illinois State Dental Society. Some dentists in college towns or other areas with lots of state workers are selling their receivables to keep their heads above water. Others are asking state employees to pay in cash, says Ronald Lynch, a dentist in Jacksonville.

"There are dentists who have to do this just to survive," says Dr. Lynch. "It's very stressful." Dr. Lynch, who hasn't asked for such cash payments, says he is owed about $250,000, forcing him to forgo a salary so he can continue to pay bills and his employees.

Health care is the capital's biggest employer apart from the state itself. Springfield's two hospital systems -- Memorial Health and HSHS St. John's -- say they together are owed more than $200 million by the state. Edgar Curtis, Memorial Health's chief executive, says he has put off a $100 million capital-expansion project because of the uncertainty. "We hate to see projects being shelved because of what is going on at the state level," he says.

The Coliseum building at the state fairgrounds in Springfield closed indefinitely earlier this year after the state failed to come up with funds needed for repairs. The closure has cost the city tourism dollars from horse shows and other events.

Springfield Mayor James Langfelder, a Democrat, says sales-tax revenue has declined by $2 million since 2015, which he attributes to state employees making fewer purchases. On top of that, the state owes the city $5 million for utilities on buildings it rents from the city.

"At first, we tried to meet with legislative representatives, we tried to highlight the urgency of this," says Mr. Langfelder, referring to the impact of the budget crisis on the city. "Now, you are almost numb to the fact. We just do whatever is in our control."

Over the past two years, Eastern Illinois University has received at least $53 million less than it would have if the average funding levels of the prior five years had held.

Professors in the chemistry department haven't been able to print in color since the department's printer ran out of yellow ink a year ago. Biochemistry professor Mary Konkle says she decided to leave her tenured position when she no longer had funding to order equipment or chemicals for her research.

"It wasn't my plan to just be here a couple of years and move on," she says.

Less than a decade ago, university enrollment was at its peak of 12,000. Then it began slipping by a few hundred a year. The decline picked up speed after the state's budget troubles began in 2015. Since then, enrollment has dropped by about 1,500 to 7,400 last fall.

Rallies and press coverage about the state budget mess raised fears the school might close, keeping students away. Administrators say it is doubtful that they will have even 7,000 students this fall.

In Charleston, where the university is based, empty storefronts litter Lincoln Avenue, the main thoroughfare running by campus. Jerry's Pizza, a staple for professors and students since 1978, closed last October, citing the university's shrinking population. "For Rent" signs are posted outside rows of apartments that cater to students, with one ad offering free iPad minis to students who sign a lease.

"Had we had 12,000 students here, the businesses would probably all still be here," says John Inyart, a former Charleston mayor who owns an auto-repair shop across from the university's main hall. He has had to cast his net wider for customers as faculty and students dwindle, he says.

"Any community that had a university was kind of like Teflon. You had that stability in your community, with stable good paying jobs," says Cindy White, chairwoman of the local chamber of commerce. "Well, now, that's not so much anymore."

If the state doesn't pass a budget in the current special legislative session or allocate emergency funding, about 700 road projects under way across the state -- worth $2.3 billion and employing 20,000 people -- will come to a stop.

"While we are hopeful the situation is resolved before then, the department is notifying contractors that all construction work is to shut down on June 30," says Gianna Urgo, spokeswoman for the Illinois Department of Transportation. "Contractors will be advised to secure work zones to ensure their safety during any potential shutdown."

Among the projects under way is a multiyear, $40 million rebuilding of several main thoroughfares that cut through the heart of Urbana, home of the state's flagship university.

The roads are now effectively closed, limiting access to retail businesses, says Urbana Mayor Diane Marlin.

"We're on a very tight construction schedule, and a lot of the work has to be done this summer before 44,000 students come back," she says. "So even a slight delay is a big problem."

Some social-services agencies have given up on receiving state funding. Others have closed entirely, leaving some rural communities without mental-health clinics, domestic-violence shelters and drug-treatment clinics, despite an opioid crisis gripping some towns downstate.

Illinois has lost more residents than any other American state for the third year in a row, with 90% of the state's counties seeing a drop in population, shrinking the state's tax base. In 2016, a net of 37,508 people left, according to census data, putting the population at its lowest in nearly a decade.

Illinois was one of just eight states in the country, and the only Midwestern one, to lose residents last year.

"It's not just the budget crisis; it's that people don't have any confidence in what the state is going to do next," says Laurence Msall, president of the Civic Federation, a nonpartisan Chicago-based government-watchdog group backed by business leaders. "There is fear of an enormous tax increase. The uncertainty is driving people from the state."

In 2014, the state's gross domestic product was growing faster than any other bordering state. In 2016, Illinois grew slower than all bordering states except for Iowa, with which it was tied.

In the Quad Cities, a metro area that spans the Mississippi and encompasses both Illinois and Iowa, population on the Illinois side has decreased by 2.5% between 2010 and 2015. Cities on the Iowa side have grown 3.7%.

Among those who have crossed the river is Kelly Daniels, an English professor at Augustana College in Rock Island, Ill.

Mr. Daniels bought a home in Rock Island a decade ago, in part because of an incentive that helped cover part of his down payment. Now married with a young child, Mr. Daniels was looking for a larger house when he decided to move. He was tempted by lower property taxes and what he saw as Iowa's relatively brighter prospects, compared with Illinois's dysfunction.

"It's not like Iowa is paradise," said Mr. Daniels, who grew up in California.

--Heather Gillers contributed to this article.

(END) Dow Jones Newswires

June 27, 2017 15:30 ET (19:30 GMT)