CHICAGO (Reuters) - Illinois Governor Bruce Rauner expressed optimism on Monday that the financially struggling state could begin fiscal year 2017 on Friday with a temporary budget in place to fund essential services.

However, a battle is brewing over a full-year spending plan for K-12 schools with Senate Democrats seeking a nearly $400 million boost for the cash-starved Chicago Public Schools (CPS)despite the governor's opposition.

The nation's fifth-largest state has limped through the current fiscal year without a complete budget, relying on court-ordered spending and ongoing stopgap appropriations to operate in the wake of an impasse between the Republican governor and Democrats who control the legislature.

Lawmakers ended their spring session on May 31 without passing a new budget, raising questions over Illinois' ability to operate for a second straight fiscal year without a spending plan.


The legislature is back in session on Wednesday for the first time this month.

Rauner is pushing legislation that would fund state services until January and provide a $240 million increase for schools over the entire fiscal year.

"I think the good news is it looks like we pretty well have an agreement on the stopgap budget itself," Rauner told reporters at an Illinois State Capitol news conference, characterizing remaining differences with Democrats on spending levels as minor.

The governor warned the school funding bill remains imperiled by Democratic demands for a CPS "bailout" that he refuses to support.

"CPS has been financially mismanaged for decades. It's not the fault of the people of Illinois," Rauner said, adding that bankruptcy was a better option for the district.

The third-largest U.S. public school system had been seeking $480 million from Illinois for teacher pensions and a revamping of the state school funding formula to ensure more money flows to poor students.

A bill Senate Democrats plan to introduce on Tuesday would hike general state aid to schools by $760 million, with nearly $287 million of that earmarked for CPS, which would get another $112 million for pensions.

Senate President John Cullerton is hopeful that a bipartisan budget plan and school funding bill will come up for votes when the legislature meets on Wednesday, according to a statement from his office. Steve Brown, a spokesman for House Speaker Michael Madigan, said the House will "vote on measures that reflect the progress that has been made by the stopgap budget working group."

(Reporting by Karen Pierog; Additional reporting by Dave McKinney; Editing by Matthew Lewis and Bill Rigby)

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