CHICAGO — Illinois' Department of Human Services expects to expand a pilot program early next year that links state vendors with private investors willing to purchase overdue vouchers as the state's liquidity and budget crisis shows few signs of easing.
The DHS vendor payment pilot program was launched in October, making up to $100 million in private cash available to cover late payments from various lenders, including commercial and investment banks. The state expects the capital will be available to cover up to $2.5 billion of eligible bills under the expanded program that will be unveiled during the first week of 2011. In exchange, the lenders collect the 1% monthly interest payment the state otherwise would owe the vendor after 60 days.
"The program is intended to move vouchers from our vendors to investors who are used to holding financial assets," said debt manager John Sinsheimer. "The state is acting as a facilitator because vendors who have payroll need to get paid while the governor and General Assembly work towards a comprehensive solution to the state's financial challenges."
While vendors complained of the hardships they faced, the state also was growing more concerned when officials heard lenders were privately approaching vendors offering rates like 20 cents on the dollar to purchase their vouchers, according to state spokeswoman Kelly Kraft.
The state's backlog of bills featured prominently in a "60 Minutes" segment Sunday on CBS on the severity of state budget woes. It included an interview with Illinois Comptroller Dan Hynes, whose office manages vendor payments.
The state closed out fiscal 2010 June 30 with $6.4 billion of unpaid bills as Gov. Pat Quinn had little will to deeply cut spending and lawmakers were unwilling to raise taxes ahead of the election. Under emergency budget legislation, the government has until the end of December to pay off fiscal 2010 bills and expects to do so with proceeds of a $1.46 billion tobacco bond issue completed earlier this month and through inter-fund borrowing.
The state closed out the first quarter of fiscal 2011 on Sept. 30 with $5.5 billion in fiscal 2010 and 2011 bills outstanding, according to Hynes, who also warned in his most recent quarterly newsletter that the state faces an up to $15 billion deficit going into fiscal 2012.
Under the program, an eligible vendor sells its outstanding receivable to a qualified purchaser who in turn pays 100% of the voucher. The vendor assigns his right to payment to the lender and 90% of the overdue payment is received. The other 10% is held in an interest bearing account and paid after the state pays off the debt to the purchaser-lender.
So far, $310,000 in payments have been made with Trivergance LLC purchasing the vouchers, according to Kraft. A total of 20 vendors applied, but just six qualified. To qualify, vendors must have invoices that are at least 60 days past due. Medicaid invoices are not eligible for participation in the program due to federal rules although the state is working to find a way to include such vendors, Kraft said.
The consortium of lenders participating in the program so far include Trivergance, Cabrera Capital Markets LLC, Covenant Bank, JTL LLC, and Pan American Bank.
The program does not set deadlines for state reimbursement. Sinsheimer stressed: "Payments are made based on the state's cash flow. The lenders are not granted any protections of the state's general obligation pledge."
Illinois in fiscal 2010 used short-term cash flow borrowing to help pay down its backlog of bills, but interest rates have risen amid ongoing news over the state's woes. Investor interest has also been stretched amid a saturation of Illinois paper in the market this year totaling $10.1 billion to fund a $31 billion capital program and 2010 pension payments. Quinn also needs the comptroller and treasurer to sign off on short-term issues.
Moody's Investors Service in September put the state's A1 rating on $25 billion of GO debt on negative watch. Fitch Ratings assigns an A and a negative outlook to the GOs and Standard & Poor's rates the state A-plus with a negative watch.