An already bleak budget outlook for the state of Illinois continues to deteriorate because of investment losses on Wall Street.

As the economy slips into a recession, budget forecasters anticipate little growth in tax revenue as they make preliminary plans for the next fiscal year, which begins in eight months.

The Dow Jones Industrial Average Friday closed 33 percent below the level it was at one year ago.

This turmoil on Wall Street likely will result in taxpayers making up for investment losses within the state's public-employee pension systems either with higher taxes or through state spending cuts.

State pension assets dropped almost $14 billion in the period from Oct. 1, 2007, to Sept. 30.

What this means is that pension systems, underfunded by the state for years, face an even bigger gap between their assets and what they'll ultimately pay retirees.

For example, in June 2007, the Illinois Teacher's Retirement System, or TRS, was at a funding level of 64 percent, making it one of the most underfunded public pension systems in the nation.

But the bear market has sent investments within the system into a tailspin. A June 30, 2008, audit found that due to investment losses the fund is now funded at only 56 percent level, according to a report issued Thursday by TRS.

A complex formula determines how much the state contributes to the pensions each year. But investment performance is a key factor in determining that contribution level.

A final number for how much the state legislature will be asked to appropriate for pensions is not yet known. But last week the TRS board voted to increase the level of the state's contribution by $248 million said Eva Goltermann, a spokeswoman for the system.

State Rep. Frank Mautino, D-Spring Valley, said the TRS request portents more bleak news from other public pension systems, which are expected to make there requests to legislature in coming months.

The pensions are far from broke. The Teachers' Retirement System, for example, had $34.1 billion at the end of September, even after its assets plunged $8.2 billion, or 19 percent.

"These pension payments are something we must pay," said state Rep. Careen Gordon, D-Morris. "This will aggravate an already tough budget year and likely will result eating up much of the new revenue being taken in by the state. But we don't have a choice. This is something we have to pay."

The state budget approved by the state legislature for the current year is about $59 billion and calls for spending as much as $2 billion more than the state is expected to receive in revenues.

Having to make up for pension fund investment losses could make next year's budget even more difficult to balance, said state Sen. Mike Jacobs, D-East Moline.

Paying those pension obligations may well lead to cuts in other state programs, he said. One of the most likely areas to face cuts is Gov. Rod Blagojevich's efforts to expand health care coverage in Illinois, he added.

"That's a rapidly growing cost to the state," Jacobs said. "As a legislator, that's a tough program to vote against. But people don't want to pay higher taxes or have bigger government. We have to learn to make do with what we have. We need to make tough decisions on where to cut and what to do without."

Jacobs added that it is unlikely the legislature would approve a tax increase during the next two years.

"Rod Blagojevich hasn't kept many promises, but one he has kept is not to raise the income or sales tax. As long as he is governor, I can't see the legislature even trying to do that," he said.

Not only is the state adversely affected by the declining stock market, but also it is hurt by low interest rates on government bonds, a place where the state treasurer parks tax money entering state coffers and waiting to be spent.

Three-month treasury bills yielded 0.43 percent Friday, near one of its lowest levels ever.

In the 2007 fiscal year, the state collected $426 million in short-term interest income. In 2010, interest income likely will drop by about $200 million, state Treasurer Alexi Giannoulias said.

"This is going to have a significant impact on the state of Illinois," he said "It's really tough out there. There is grave concern on our part that interest income isn't where it has been in previous years."