Illinois fix to unpaid bills may end up
as financial time bomb
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[November 23, 2016]
By Dave McKinney and Karen Pierog
CHICAGO (Reuters) - Illinois owes a handful
of financial consortia more than $118 million under an obscure program
intended to speed up overdue payments to the cash-strapped state's
vendors, an analysis of state records shows.
Political feuding between Republican Governor Bruce Rauner and Democrats
who control the legislature has kept Illinois without a full operating
budget since July 2015, contributing to a doubling of the unpaid bills
backlog. The amount of overdue bills could reach $13.5 billion, or 40
percent of available operating revenue, when the current fiscal year
ends June 30, the Rauner administration has projected.
Come fiscal 2022, the backlog is projected to balloon to $47 billion. No
other U.S. state defers payments to the extent Illinois does to manage
cash flow, credit-rating analysts said.
The one-of-its-kind, bill-payment program seeks to avert the nightmare
scenario for a state in the worst financial shape in the country: a
shutdown of essential services such as employee health insurance, a
disruption of prison food supplies or mothballing of state trooper cars
in need of fuel and maintenance.
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“I don’t think there is any other alternative for us,” Illinois Central
Management Services Director Michael Hoffman told a legislative panel in
May.
But it comes at a heavy cost with unlimited late-payment fees now
approaching 20 percent in some cases for Illinois' cash-strapped
government, whose general obligation (GO) low-investment grade credit
ratings are the lowest among U.S. states.
The state's negative credit outlook means its $26 billion of outstanding
GO bonds could lurch closer to the junk level if the growing unpaid bill
pile impairs its ability to provide essential services, affects debt
payments and inflates its already huge $130 billion unfunded pension
liability.
“No other state or business would operate by incurring obligations to
its vendors and setting up a third-party payment structure that
dramatically inflates the costs of those services,” said Laurence Msall,
president of the Chicago-based Civic Federation, a non-partisan
government watchdog.
Under the Vendor Support Initiative (VSI) program launched last year to
replace a similar plan introduced in 2011, state vendors can get paid
without delay 90 percent of what they are owed by state-designated
financial lenders.
When the state finally pays, the vendors get the final 10 percent, while
the lenders keep the late-penalty fees. In Illinois, receivables more
than 90 days past due accumulate interest at a rate of 1 percent per
month.
BANKS AND INSIDERS
For the lenders, the risk is that the state will not pay up and they
will need to fight for compensation in courts, but that has not happened
yet.
The firms include financial institutions such as Citibank N.A. <C.N> and
Bank of America Corp <BAC.N>, a distressed debt investor tied to a
Rauner campaign donor, and political insiders, including Hillary
Clinton's 2008 campaign manager and a former two-term Republican
Illinois governor.
Lindsay Trittipoe, majority investor of the second-largest consortium,
Illinois Financing Partners LLP, told Reuters his group was performing a
vital function rather than exploiting the state’s financial miseries.
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"Our money is flowing into the market, helping the wheels of commerce to
keep working," he said.
Citi and Bank of America declined to comment for this story and
representatives from the largest state-qualified buyer of receivables,
Chicago-based Vendor Assistance Program, and some of its investors did
not respond to interview requests.
Fees on unpaid bills in the program have been growing by more than $2.6
million per week and could exceed $194 million by June 30, according to
a Reuters analysis of state data as of Sept. 28.
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![](../images/112316pics/news_a1.jpg)
Illinois Gov-elect
Bruce Rauner talks to the media after a meeting with U.S. President
Barack Obama at the White House in Washington December 5, 2014.
REUTERS/Larry Downing/File Photo
![](../images/ads/current/richardson_lda_090916.png)
By the end of Rauner's term in January 2019, total interest on
unpaid receivables in the program could exceed $351 million if there
is no progress in reducing the bill backlog, Reuters calculations
show.
That total represents more than what Illinois allocated in operating
funds last June to keep seven of its nine public universities open
for six months.
NO LIMIT
As of late September, four participating VSI lenders had bought
15,369 unpaid receivables worth $1.12 billion under the program.
Late-payment penalties on those billings surpassed $118 million and
continue to grow, Reuters has found.
Illinois law places no limit on how long the late fees can accrue
and since 2010 the state has spent about $929 million in
late-payment penalties, according to state comptroller data.
Three of the four firms now involved also took part in a similar
program launched under previous Democratic Governor Pat Quinn. Its
current version has sparked questions over how firms were vetted, a
lack of up-to-date disclosures about their owners and financing, and
patchy accounting of vendor payments.
Additionally, state business registration of one of the firms,
Payplant LLC, expired two months before the program's launch,
according to the Illinois secretary of state's office. A company
representative blamed "a procedural lapse" and said it had begun the
process in October to reinstate its LLC status.
![](http://archives.lincolndailynews.com/2016/Nov/23/images/ads/current/lincoln_heating_lda_christmas_2015.png)
“The focus should be on transparency," said Illinois Treasurer
Michael Frerichs, a Democrat. “If we have a program like this, we
don’t want to turn it over to loan sharks.”
Using the state data, Reuters calculated the average rate on late
payments at 8.14 percent through late September. During that same
period, the Dow Jones Industrial Average only gained 3.65 percent.
"It seems that (it) creates a real perverse incentive for them to
wait as long as they can," Democratic Representative Elaine Nekritz
said about the buyers of vendor invoices.
State spokeswoman Meredith Krantz defended the program, saying it
helped vendors “be paid more quickly than the state’s payment cycle
would otherwise allow.”
One big non-profit participating state vendor, Chicago-based Safer
Foundation, saw no other options.
"Do you want to get nothing or 90 percent now and the other 10
percent later?" said Victor Dickson, the group’s president and CEO.
"We chose, ‘Let's get 90 percent and keep serving our clients.’"
(Editing by David Greising, Daniel Bases and Tomasz Janowski)
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