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Illinois governor signs budget but state's problems mount

CHICAGO (Reuters) - Just hours before a new fiscal year was to begin, Illinois Governor Pat Quinn on Thursday signed a new state budget after vetoing $376 million in spending approved by the General Assembly.

The Democratic governor said he also cleaned up the fiscal 2012 budget by ridding it of more than $336 million in redundant appropriations.

"Line by line, I have carefully examined the budget passed by the General Assembly and identified areas for improvement and reduction. I also re-prioritized government spending to protect our state's core principles," Quinn said in a statement.

The reductions, which included spending for Medicaid and school transportation, shrank the general fund budget to $32.98 billion.

The General Assembly last month passed a $59.1 billion all-funds budget for the fiscal year beginning Friday that included a $33.4 billion general fund -- about $2 billion less in general fund spending than Quinn proposed in February.

The state will end the old fiscal year with $8.3 billion in unpaid bills and other obligations, including $850 million owed in corporate tax refunds, $750 million needed to repay interfund borrowing, and $1.2 billion for state employee health insurance, according to estimates by the Illinois Comptroller's Office on Thursday.

The state also owes primary and secondary school districts $1.13 billion and universities $584 million, according to the comptroller's office.

A package of bills that would have let Illinois issue $6.2 billion of seven-year general obligation bonds to pay bills failed to gain support in the Legislature. Quinn had originally pushed for selling $8.75 billion of 15-year bonds to pay bills.

Without any bonds, the $8.3 billion of fiscal 2011 bills and obligations will have to be paid off by the end of December with fiscal 2012 revenue, exacerbating the state's structural deficit.

A 67 percent increase in the personal income tax rate and 46 percent hike in the corporate tax rate enacted by the state in January has been absorbed by Medicaid and public pensions and were not helping to pay bills, according to Illinois Comptroller Judy Baar Topinka.

In his budget veto messages, Quinn said he will continue to work with legislative leaders on paying the state's overdue bills.

Illinois' widening structural deficit, huge unfunded pension liability, inability to pay its bills on time, cascading bond ratings and propensity to borrow its way out of financial problems have made the state a major worry in the $2.9 trillion U.S. municipal bond market.

(Reporting by Karen Pierog; Editing by Greg McCune)

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