Penalties on Overdue Bills Add Up for State of Illinois

February 17, 2016

In recent years, Illinois’ delayed payment of bills has caused financial stress for vendors, social service agencies and local governments. It has also cost the State $1.0 billion in interest penalties since fiscal year 2006, according to data from the Illinois Comptroller’s Office.

Under the State Prompt Payment Act, interest accrues at 1% a month on “proper bills” that are not paid within 90 days. Proper bills are defined as those that include the information needed to process the payment. Other claims, including those from healthcare providers, accrue interest at 9% a year after 30 days under the Illinois Insurance Code.

As shown in the chart below, the State’s interest penalties began to climb in FY2008, as unpaid bills accumulated during the Great Recession. The vast majority of penalties in the past ten years have been paid by the Departments of Healthcare and Family Services (HFS) and Central Management Services (CMS). HFS administers the Medicaid program and was in charge of employee and retiree group health insurance before FY2013, when the responsibility was shifted to CMS.

Interest penalties are not paid until the State pays the underlying bills, which means that the amount of interest penalties paid depends on the timing of bill payments. It should also be noted that many types of payments owed by the State, including grants and transfers to local governments, are not eligible for interest when payment is delayed.

Interest penalties peaked in FY2013 at $317.8 million, largely due to a pay down of Medicaid bills. As discussed here, late payment of group health insurance bills has accounted for most of the recent interest penalties paid by the State. In FY2015 the State paid a total of $126.1 million in interest penalties; of that amount, $106.4 million, or 84.4%, was related to the State group health insurance program.

Most bills must be paid from the current year’s appropriations during the lapse period, the period during which next year’s revenues may be used to pay this year’s bills. Due to the large amount of payables outstanding at the end of the fiscal year, the lapse period was temporarily extended to six months from two months beginning in FY2010. The longer lapse period was made permanent in FY2013.

State vendors that are owed money after the end of the lapse period based on unpaid appropriations may seek compensation in the Illinois Court of Claims. The Court of Claims paid out $5.2 million in interest penalties since FY2006, according to the Comptroller’s data.

Unlike most other State bills, Medicaid bills and group health insurance claims may be paid from future years’ appropriations under exceptions to Section 25 of the State Finance Act. The ability to defer Medicaid bills in this way was sharply limited starting in FY2013, but the restrictions did not apply to health insurance claims.

In the absence of an FY2016 State budget, the group health insurance program is one of the major areas of State government for which there appears to be no legal authority to pay bills. Nevertheless, the program’s costs must be paid eventually because of State law and union contracts.

According to Governor Bruce Rauner’s office, the backlog of health insurance claims totaled $2.7 billion at the end of January 2016, up from $1.3 billion a year earlier. The total backlog of unpaid bills stood at $6.3 billion, compared with $6.0 billion in January 2015.