CHICAGO – A federal judge put off until at least Friday a decision on how much more the cash-strapped Illinois state government needs to pay to comply with existing Medicaid-related consent decrees.
The state offered $150 million, including $75 million from its own coffers and $75 from federal matching funds, an offer rejected by lawyers for Medicaid recipients who in turn asked the court to order the state to pay $586 million monthly for new bills.
They also want another $500 million monthly for the next four months to pay down a now $3.1 billion backlog in overdue vouchers. Half would come from federal reimbursements.
Judge Joan Lefkow, of the U.S. District Court for the Northern District of Illinois Eastern Division in Chicago, told the plaintiffs she needed additional evidence, in the form of an affidavit showing recipients are being denied care, to support their contention that nearly $1.1 billion was needed monthly.
Lefkow also asked the state to outline in order form its payment offer and a timeline for bringing down the backlog in a filing due Thursday. She said she may make a decision Friday.
“I think the bottom line” is the state is not currently in compliance with the consent decrees but the remedy, or how much more the state will have to pay, “is not fully resolved,” Lefkow said from the bench.
Lefkow last month found the state in violation of existing consent decrees but she stopped short of ordering Comptroller Susana Mendoza to move Medicaid payments ahead of core priority obligations. Instead, she asked the two sides to negotiate an agreement, giving the state some breathing room as its budget stalemate nears a third fiscal year come July 1.
The negotiations failed, prompting the plaintiffs to seek the order requiring the state to make nearly $1.1 billion in payments in the coming months. The amount requested is needed to right the system and provide assurances to Medicaid service providers and managed care organizations that payments will be sped up.
“We are asking for a shift in the priorities,” said plaintiff attorney David Chizewer, of Goldberg Kohn Ltd. “They can afford to do more.”
The state countered that it was being asked to draw “blood from a stone” and to agree “to the impossible,” said Brent Stratton, an assistant attorney general in Attorney General Lisa Madigan’s office. The “money is not there to allow that to happen.”
The comptroller is managing an almost $15 billion backlog of delinquent bills.
The state argued that $1.1 billion a month is not needed to bring it into compliance because the plaintiffs have not shown that any class members have been denied Medicaid services. The state believes its $150 million offer is “sufficient” to “sustain the system and services until a budget is approved,” Stratton said.
The state asked the court to reject the plaintiffs’ requested order and to limit any decision on a payment amount to one aimed solely at sustaining the system. If ordered to bring down the backlog, Stratton asked for flexibility on the four month time period since revenue collections ebb and flow monthly.
Lefkow said the fact that others – such as state employees – receive 100% of what’s owed them while Medicaid is receiving far less weighs on her thinking.
Stratton said there’s no clear cut rules in how the state’s $1.85 billion of core obligations are set with consideration given to the consequences on non-payment, statutes, and court orders. For instance, failing to fully meet debt service requirements could “trigger credit downgrades” and raise borrowing costs adding to the state’s woes.
The state’s last filing submitted Tuesday offered a stark view of the state’s precarious cash flow. If the court approved the plaintiffs’ order, the state would lack about $700 million needed for core priority payments in August. About $160 million is currently paid out for Medicaid but the backlog on Medicaid related payments now represents about $3.1 billion of a $4.1 billion backlog in medical-related expenses.
Payroll, debt service, local distributive aid, and monthly pension contributions are among core priorities but due to the ebb and flow of revenue the state will fall short next month by about $185 million to fully meet just its prioritized payments.
Mendoza has said her office will not “diminish” or “delay” debt service and will use all legally available revenues to honor that commitment under the state’s sturdy GO Bond Act.
Lefkow’s pending decision could rattle municipal investors depending on the size of additional payments. Her finding earlier this month that the state had violated consent decrees by letting the bills pile up drove state general obligation spreads up 50 to 100 basis points in trades the following day. Yields settled down in subsequent trading days.
The looming decision also amplifies pressure on Gov. Bruce Rauner and lawmakers who are meeting in special session in hopes of resolving the budget conflict before the new fiscal year begins Saturday.
Rating agencies are also watching closely as the state’s deeply strained liquidity is a key credit factor. Moody’s Investors Service and S&P Global Ratings downgraded Illinois to the lowest investment grade level of Baa3/BBB-minus after the regular session ended May 31 without a budget fix.
Moody’s cited court orders that add to the state’s list of priority payments as a factor that could lead to another hit. S&P made clear a drop to junk likely looms absent a budget agreement by the start of the fiscal year July 1.
Fitch Ratings views the beginning of the new fiscal year as a key marker for a downgrade of the state’s BBB rating.