(Bloomberg News) Illinois lawmakers will try this week to accomplish in a few days what they have been unable to do in the past two years-resolve the state's worst financial crisis.

The legislative session that begins today will take aim at a budget deficit of at least $13 billion, including a backlog of more than $6 billion in unpaid bills and almost $4 billion in missed payments to underfunded state pensions.

The fiscal mess is largely of the lawmakers' own making, and failure to address the shortages threatens public schools, local governments and other public services, said Dan Hynes, the state's outgoing comptroller.

"We've reached a very critical and concerning point," Hynes said in an interview in his Chicago office, with packing boxes stacked in the corner. "What's missing right now is a general understanding by the public of where we are, of how bad it is, and what the fallout would be if we don't deal with it properly."

What the public may not appreciate, Wall Street does. Illinois shares with California the lowest U.S. state credit rating from Moody's Investors Service, which in September forecast possible "further financial deterioration." Unlike California, Moody's assigned Illinois a negative outlook.

Illinois's deficit, about half its $26 billion general-fund budget, puts it among the U.S. states confronting $140 billion in shortfalls in the coming fiscal year after closing $160 billion in gaps this year, according to the Center on Budget and Policy Priorities, a Washington research group.

Debt Costs Rising

Hynes, 42, predicted the deficit might rise to $15 billion by midyear, and that prospect has come with a price tag. The cost of insuring Illinois debt against default rose to a five- month high last week as the state headed into this year without a plan to finance a $3.7 billion pension-fund contribution.

Insuring $10 million of Illinois debt against default cost $350,000 a year on Dec. 29, more than California's $298,000, according to data compiled by Bloomberg. Illinois and Arizona were the weakest states in a Dec. 30 financial-strength index report from the Chicago office of BMO Capital Markets, a financial services company.

Lawmakers meeting in Springfield will consider spending cuts, an expansion of casino gambling and a proposal from Democratic Governor Pat Quinn to borrow $15 billion to pay overdue bills and help fill the budget hole.

Quinn, 62, also has proposed boosting the state income tax to 4 percent from 3 percent, raising about $3 billion a year.

Borrowing Plan

The governor needs Senate approval of a borrowing plan to make this year's payment into the pension funds. The Illinois State Board of Investments will start buying back assets sold to pay benefits if lawmakers approve the debt sale, William Atwood, executive director of the panel, said in an interview on Bloomberg Television today.

The three pensions run by the board, which manages $10 billion, have been selling assets to pay retirees since Illinois failed to contribute for the fiscal year that began July 1.

Borrowing by Illinois is what credit analysts, Hynes and bond investors point to as a major reason why the state's financial standing fell so far so fast.

Gross Criticism

Bill Gross, who runs the world's biggest bond fund at Pacific Investment Management Co. in Newport Beach, Calif., said Illinois was one of the states whose debt he would avoid.

"Illinois is probably in the worst shape," Gross said in a Dec. 28 interview on CNBC.

The widening gap between Illinois's expenses and revenue drew criticism from Moody's. The disparity underscored the state's "chronic unwillingness to confront a long-term, structural budget deficit," it said in a Dec. 29 study.

The worst financial crisis since the Great Depression and politicians' unwillingness to cut budgets explain the descent since 2008, said Tom Johnson, president of the nonpartisan Taxpayers' Federation of Illinois. Annual sales and income-tax revenue fell for the first time in modern history, he said.

"The state was hoping for a quick recovery or inflation, and they didn't get it," Johnson said in a telephone interview. "And there was no appetite to reduce the escalating costs of spending."

'Revenues Went South'

The falloff in revenue aggravated the state's historic practice of delaying payments to vendors and carrying those costs on from one year to the next.

"Revenues went south, spending went north," Johnson said. "It's unsustainable."

The current-year budget deficit of $13 billion is roughly half the size of the state's general-fund budget. Borrowing to pay bills continues. In November the state sold $1.5 billion of bonds backed by tobacco settlement payments to help pay vendors.

"We have seen a lot of the budgetary tools that really don't qualify as real solutions used, whether it's short-term borrowing, pension borrowing, delays in payments, the sale of future revenues," Hynes said.

Illinois business leaders have warned that the state's failure to properly fund pensions means the plans will run out of money to pay promised benefits before the decade ends.

"We're in the midst of the most severe financial crisis in recent memory," Miles White, chairman of Abbott Park, Ill.-based Abbott Laboratories, said Sept. 27 at a forum on state affairs.

Operating Expenses

"The state has been spending $3 for every $2 it takes in, and borrowing to cover its current operating expenses," said White, chairman of the Civic Committee of the Commercial Club of Chicago.

The state had $64 billion of assets to pay estimated liabilities of $126.4 billion as of June, or less than half the amount needed for almost 723,000 workers, retirees and other beneficiaries, according to bond documents.

The question facing lawmakers is whether they can reverse the slide into more debt. The gravity of the situation is registering with the General Assembly, said James Nowlan, a former member of the state House and now a senior fellow at the University of Illinois Institute of Government & Public Affairs.

"I think they're finally educated that all the one-time adjustments and shenanigans have been pulled, and they are now facing the fiscal abyss," Nowlan said in a telephone interview. "But maybe I'm too hopeful."