CHICAGO (Jul 5, 2010)

Even by the standards of this deficit-ridden state, Illinois' comptroller, Daniel W. Hynes, faces an ugly balance sheet. How ugly is clear when you examine his daily briefing memo.

He points to a figure in red: $5.01 billion (all figures US).

"This is what the state owes right now to schools, rehabilitation centres, child care, the state university -- and it's getting worse every single day," he says.

For years, California stood more or less unchallenged as a symbol of the fiscal collapse of states during the recession. Now it's Illinois, as its dysfunctional political class refuses to pay the state's bills and refuses to take the painful steps -- cuts and tax increases -- to close a deficit of at least $12 billion, equal to nearly half the state's budget.

Then there is the spectacularly mismanaged pension system, which is at least 50 per cent underfunded and, analysts warn, could push Illinois into insolvency if the economy fails to pick up.

Signs of fiscal crack-up are easy to see. Legislators left the capital this month without deciding how to pay 26 per cent of the state budget. The governor proposes to borrow $3.5 billion to cover a year's worth of pension payments, which would cost about $1 billion in interest.

School districts have fired thousands of teachers, curtailed kindergarten and electives, drained pools and cut after-school clubs. Drug, family and mental health counselling centres have slashed their workforces and borrowed money to stave off insolvency.

The state pension system is a money sinkhole and the most immediate threat. The governor and legislature have shortchanged the pensions since the mid-1990s, taking payment "holidays" with alarming regularity.

The state's last elected governor, Rod R. Blagojevich, is on trial for racketeering and extortion. But in 2003, he persuaded the legislature to let him float $10 billion in 30-year bonds and use the proceeds for two years of pension payments. That gamble backfired and wound up costing billions of dollars.

Legislators this year raised the retirement age and slashed benefits. Although changes apply only to future employees, the legislature claimed immediate savings.

Illinois is caught between blue-state convictions about social safety nets and a red-state aversion to taxes. It spends a minor fortune papering over its budget holes.

In the past, when non-profits needed credit to see them through tough budgets, the comptroller issued letters assuring banks vendors would be paid. Not anymore.

"I don't feel comfortable doing that," Hynes said. "I mean, who knows, right?"