By Fiona Ortiz

SPRINGFIELD, Ill. (Reuters) - The financially troubled state of Illinois edged closer on Tuesday to a government shutdown as Democratic lawmakers and the Republican governor failed to resolve a budget impasse ahead of a midnight deadline.

Veteran House Speaker Michael Madigan said he would present an emergency one-month budget on Wednesday to keep essential services operating, but Republican Governor Bruce Rauner, in office since January, has signaled he would not accept such a measure.

"This is another opportunity to not shut down the government," Madigan told reporters.

Also on Tuesday, the Chicago Public Schools made a $634 million state-mandated payment to its teachers' pension fund beating a midnight deadline, according to a fund official.

Madigan said the payment eliminated the need for legislation that would have given the cash-strapped district another 40 days. School administrators did not say how they came up with the funds for the huge payment that had become the latest in the recurring fiscal crises rocking Illinois and its biggest city, Chicago.

Illinois has the worst-funded pension system and the lowest credit ratings among the 50 states, and one credit rating agency has assigned junk-bond status to Chicago.

Madigan said his $2.26 billion temporary state budget will fund services including Medicaid, corrections, state police and childcare.

Rauner, who last week vetoed most of a $36.3 billion budget passed by Democrats, has said he would not accept a temporary fiscal 2016 budget.

Earlier on Tuesday, Rauner vowed to keep the fifth-largest U.S. state operating in the absence of an enacted spending plan.

"In the meantime, we're going to manage the government without a budget, try to minimize the disruption to the people of Illinois and we're committed to working hard to make sure the men and women that serve the government are paid their full salaries on time," he said.

The governor has insisted the House and Senate - both controlled by Democrats - take up his-so-called turnaround reforms, including a local property tax freeze, legislative term limits, and workers' compensation changes, in order to aid the state's sagging finances and boost economic growth.


The House held a sometimes-contentious meeting on Tuesday over a potential government shutdown. State agency heads who were invited to testify did not appear and were represented instead by top budget and legal officials in Rauner's administration.

Democrats called dozens of tearful disabled people, the elderly, parents of autistic children, social service and healthcare providers and caregivers, to testify that they will face hardship if Rauner's proposed budget cuts are implemented.

"The people of Illinois need to know who will be hurt and what we will do to provide essential services ... who will be paid, who won't be paid," said Democratic State Representative Lou Lang, who chaired the meeting.

Rauner signed a school funding budget into law, but vetoed other fiscal 2016 spending bills, citing a nearly $4 billion hole in the Democrats' $36.3 billion budget.

Illinois Budget Director Tim Nuding said the budget violated the state constitution because of the revenue gap.

"It deserved to be vetoed," he told the House.

The Illinois comptroller has said most state payments, including payroll, will stop without appropriated funds. State Attorney General Lisa Madigan on Monday said Illinois' constitution and statutes prohibit expenditures in the absence of an approved budget.

But Rauner insisted that a deal can be worked out to keep paying workers. He also rejected criticism from Speaker Madigan, who has said Rauner's "extreme" reforms were deterring progress on a budget deal.

"Our policies are not extreme at all. They're common sense and they're bipartisan," Rauner said, adding Illinois' debt, deficit, property taxes, and conflicts of interest were extreme instead.

Regarding the last-minute payment to the Chicago teachers' pension fund, representatives of Chicago Mayor Rahm Emanuel and CPS did not immediately respond to requests for comment. The Chicago Board of Education last week approved a $200 million cash-flow borrowing that could be tapped for the payment.

(Additional reporting by Karen Pierog in Chicago; Editing by David Greising, Matthew Lewis and Bernard Orr)