Will Illinois borrow to pay off the backlog?

August 25, 2017

Seven weeks after the General Assembly enacted Illinois’ first budget in three years by overriding the Governor’s veto, the backlog of bills owed by the State still stood at $14.5 billion.[1]

As this blog discussed in July, the General Assembly’s budget did not attempt to address the entire backlog in a single year. Rather, the Budget Implementation (BIMP) Act authorized a package of measures that sponsors claimed would reduce the deficit by about $8 billion. The act authorized up to $6 billion in borrowing from capital markets, a measure endorsed by the Civic Federation in its FY2018 Roadmap for the State. However, the small projected budget surplus was estimated to support only $3 billion in borrowing capacity. The plan was to use the proceeds to pay Medicaid bills, which would lead to another $2 billion in federal reimbursements that would pay down additional bills. Additionally, the BIMP authorized $1.2 billion in two-year interfund borrowing, $1.8 billion in use of cash balances in two General Funds and $293 million in sweeps from other funds.

However, the week after the budget passed, Illinois Comptroller Susana Mendoza started to express doubt that the full $8 billion in backlog reduction could be achieved in FY2018, saying that she expected that only about half that was possible.

In response to Comptroller inquiries, a letter from the Governor’s Office of Management and Budget on August 2 detailed currently available funds for only $226 million of the $293 million in sweeps and only $467 million of the $1.2 billion for interfund borrowing. However, the letter indicated that other funds could become available throughout the year.

Shortly thereafter the Comptroller began calling into question the Governor’s commitment to execute the borrowing plan, and urged his office to expedite the process. The Comptroller’s Office estimates that the State pays $2 million per day in interest costs under the Prompt Payment Act, which requires the State to pay more than 12% interest on some overdue bills, and the Timely Pay provisions of the Insurance Code which require 9% interest on overdue doctor and hospital bills.

The Governor has said that borrowing is “not an optimal answer.” He urged the Comptroller to move forward with the sweeps and interfund borrowing that GOMB identified in its letter, and said that he would work with the General Assembly on an appropriation to pay the debt directly and implement other reforms. Paying down the backlog directly would be cheaper over the long run than borrowing, but cannot be accomplished without additional revenues or expenditure reductions not contemplated by the enacted budget. No such measures have been proposed, as both the General Assembly and the Governor have been occupied with negotiations over school funding reform.

The Governor also vetoed HB3649, legislation promoted by the Comptroller that would have required executive agencies to report monthly on unpaid bills that had not yet been sent to the Comptroller’s office. The Governor called the bill an attempt to “micromanage” executive agencies. The Comptroller called on the General Assembly to override the veto, saying that the bill is necessary to inform the public about the cost of unpaid bills.

Even if there were agreement by State leaders over the desirability of borrowing to pay off the backlog, the State still faces the challenge of executing a large deal with the lowest credit ratings of any state in the nation. The ratings companies have held back on threatened downgrades to junk status since the State adopted the budget, but maintain negative outlooks. Fitch specifically cited the risk of “uncertainties related to successful implementation of the budget… [including] reducing the accounts payable backlog in the near term, including by coming to market with bonds.” S&P stated that the potential budget savings from borrowing to pay off the backlog would be a credit positive and could help stave off further downgrades.

The optimal timing of a bond sale is also difficult to foresee. While the impasse over school funding threatened districts’ ratings, investors have expressed more confidence in the State’s credit since the passage of the budget. The spreads on Illinois bonds narrowed from a high point of 355 basis points in June to 178 basis points this week.

If bonds are to be issued to reduce the backlog in FY2018, the transaction must be completed by December 31, 2017, the latest date authorized in the Budget Implementation statute.

[1] As of August 24, 2017.