Illinois Senate Minority Leader Christine Radogno is one of the architects of a "grand bargain" being pitched as a way to break the state's budget gridlock.

CHICAGO – A $7 billion borrowing proposal to help pay down Illinois' record $11 billion unpaid bill backlog offers a more affordable alternative to the current 9% to 12% rate the state is racking up on its late payments.

That's according to the Chicago Civic Federation's Institute for Illinois' Fiscal Sustainability, which reviewed the pros and cons of the borrowing idea given the high yields Illinois pays to sell bonds.

The proposal to borrow to reduce the state's bill backlog is part of a "grand bargain" Senate Minority Leader Christine Radogno, R-Lemont, and Senate President John Cullerton, D-Chicago put together in an effort to break the deadlock that has left the state without a budget for almost 19 months.

Senate Bill 4 would authorize the borrowing with the proceeds aimed at bringing the payment cycle down to 30 days from the current high of 18 months. The state general obligation restructuring bonds would be taxable and issued by September 1. The state would further trim the backlog with $900 million expected to come from new casino license fees.

Other pieces of the "grand bargain" would approve spending for the remainder of fiscal 2017, raise more than $6 billion in taxes, temporarily freeze local property taxes, and implement other governance and policy reforms.

Senate leaders delayed a vote last week and plan to take up the plan when they return next week. Its fate in the House is uncertain.

"Is it appropriate for Illinois to borrow to pay off its backlog?" the institute asks in its report. In ordinary circumstances, the organization said it would say "no" because opposition to government borrowing for operations is a "core principal of the Civic Federation, and to do so is a hallmark of fiscal irresponsibility."

Illinois' current fiscal situation is so extreme that the federation is no longer outright opposed as long as the borrowing is limited and highly restricted in its use. "Given the enormity of the task of rebalancing the budget itself, the idea of borrowing to repay the accumulated backlog merits a reevaluation," the institute wrote.

The most compelling argument is the savings afforded by paying down the backlog. Under state law, interest is accrued at a rate of 1% monthly – or 12% annually -- on most bills due after 90 days. Healthcare related bills accrue at an interest rate of 9% annually after 30 days.

The comptroller's office, which pays the state's bills, has estimated interest costs of $700 million during the current fiscal year. Interest payments peaked at $318 million in fiscal 2013 but the backlog was billions lower then.

Gov. Bruce Rauner's administration projects the backlog will hit $13.5 billion by the end of fiscal 2017 on June 30 and exceed $20 billion in fiscal 2018 without action.

The borrowing would be costly – with total debt service payments estimated at $1.1 billion annually -- given the state's heightened spread penalties because its credit erosion, budget mess, and political gridlock.

Its size could also cut into market appetite for future Illinois GO paper issued for much needed capital spending, and whether investors would absorb the full amount in the absence of a budget solution is unclear, the report warned.

For the bill authorizing the borrowing to pass, the entire "grand bargain" package to balance the state's books in the coming year must be approved.

The report noted that the state paid a yield of 2.88% on its five-year maturity in its last GO issue in November, a spread of 176 basis points over the Municipal Market Data's top-rated benchmark. The rate expected on the short-term taxable borrowing will be higher given the lack of a tax-exemption and a rising rate environment, but would still fall below the 9% to 12% the state pays now.

The bond proceeds would be restricted to paying for existing bills so any effort to divert them for new spending would be blocked. The borrowing also would permit the state to quickly pay off social service vendors starved for cash during the budget impasse.

"Eliminating the bill backlog immediately could help stabilize vendor finances and help restore confidence in Illinois," the institute wrote.

"What is clear is that only painful, expensive solutions remain if the state is to return to a sustainable financial situation," the report concludes. "However the state ultimately clears the backlog, it must make a plan to do so quickly or the solutions will need to become increasingly drastic."

Illinois carries the lowest ratings among states.

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