CHICAGO -- Rating agencies on Friday affirmed Illinois' general obligation rating ahead of a $300 million bond sale the state plans for tomorrow.

Standard & Poor's affirmed an AA-minus rating with a stable outlook for the state, while Moody's Investors Service confirmed an Aa rating with a warning that the state must make more progress in addressing financial problems in order to maintain the rating.

Both rating agencies noted that Illinois' revenue picture is improving, but that the state's financial position remains weak.

Kathleen Quail, a director at Standard & Poor's, said Illinois has made some progress by instituting Medicaid reforms in the fiscal 1995 budget passed last month. The reforms call for placing 1.1 million Medicaid recipients into a managed care program in an effort to stem increases in Medicaid spending.

"Resolving the Medicaid issue is a step in the right direction, but in the short run we expect the state to continue to have a relatively weak cash position," she said.

Moody's said that while the $33 billion all-funds budget for the fiscal year that began July 1 does address problems related to overdue Medicaid bills and a large accumulated deficit, more needs to be done.

"The economy is improving, yet the rate of financial improvement is not commensurate with the improvement in the economy, leaving the state vulnerable to the next economic downturn should it come sooner," said Robert Kurtter, an assistant vice president in state ratings at Moody's.

He said the progress by the state to remedy an imbalance between revenues and expenditures has been slow.

"In order to maintain the rating [the state] has to show it's making greater progress in the near term," Kurtter said.

Illinois budget officials are projecting that the state's fiscal 1994 deficit, as measured by generally accepting accounting principles, will be less than the $1.9 billion deficit at the end of fiscal 1993. They are also saying that previous GAAP deficits might have been skewed due to reporting problems and could actually have been less.

But Illinois Comptroller Dawn Clark Netsch, the Democratic candidate who will face Republican Gov. Jim Edgar in the November gubernatorial election, is projecting that the GAAP deficit at the end of fiscal 1994 will grow. In a report released last month, Netsch said the state's "financial picture appears to have declined for the fifth consecutive fiscal year." Daniel Cavanaugh, director of research and fiscal information for the comptroller's office, said regardless of whether there were reporting problems with previous GAAP figures, "the gut feeling" is that the deficit will worsen. Cavanaugh said that projection is based on the fact the backlog of unpaid Medicaid bills at the end of June was "much higher" than the backlog in June 1993.

Just how much worse the deficit will get may not be known for a while. The comptroller's office releases the GAAP deficit in December, he said.

Mike Colsch, division chief of economic analysis and debt management for the state bureau of the budget, said he "fully expects" the deficit to improve. The budget office is also projecting that "lapse period" spending, the practice of using current year revenues to pay the previous fiscal year's bills, will lessen this year.

"We think we're certainly headed in the right direction at a reasonable pace," he said.

In addition to the $300 million of GO bonds the state will competitively sell tomorrow, Illinois plans to issue about $687 million of short-term GO certificates the week of Aug. 15, also in a competitive sale. Colsch said the proceeds will be used to pay Medicaid bills. Illinois has seen its GO rating slide in recent years. Moody's downgraded the rating to Aal from Aaa in 1991, and to Aa in 1992. Standard & Poor's dropped the state's rating to AA from AAplus in 1991, and to AA-minus in 1992.

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