CHICAGO – Illinois is asking a federal judge to put off the effective date of a possible court order elevating Medicaid over other payment obligations until July 1 to help raise political pressure to resolve the budget stalemate and avert further downgrades.
A ruling is expected as soon as Wednesday, June 7, from Judge Joan Lefkow of the U.S. District Court for the Northern District of Illinois’ Eastern Division about whether the state is in violation of a two-year-old consent decree and must raise the priority status of Medicaid payments.
Lefkow could raise the status of Medicaid payment to be equal to other “core” costs like debt service, pension contributions, and payroll, or put it above some of those top-ranked obligations.
“If this court enters an order granting plaintiffs their requested relief, that order could lead to another downgrade,” the state filing said.
If the order is delayed until July 1, “that likely will avoid an immediate downgrade and also would send a message to the Illinois General Assembly and governor that they have until June 30 to resolve the state’s budget impasse and avoid the consequences of the court’s order,” the filing continued.
The request from Illinois Attorney General Lisa Madigan’s office came in a filing submitted late Wednesday in response to one the plaintiffs made at a hearing Tuesday.
AG attorneys continued to argue the state is not in violation of the existing decree that ordered it to pay Medicaid providers in a timely fashion despite the lack of a budget appropriation, but they also laid out their case for delaying an adverse ruling until the start of the new fiscal year.
That would buy time to fend off a potential downgrade that could trigger swap terminations and higher floating-rate interest costs which would add to swelling fiscal strains that have driven the state's delinquent bill backlog up to $14.7 billion.
The state told the court it’s at risk based on a warning from Moody’s Investors Service in its downgrade last week of the state’s general obligation rating to the lowest investment grade level of Baa3 with a negative outlook.
Moody’s had written that “court rulings that increase the volume of payment obligations that are legally prioritized” are a factor – among others -- that could spark another downgrade.
As state lawyers “advised during the June 6 hearing, a rating downgrade would have the immediate effect of triggering provisions in several credit swap agreements that could require an immediate payment of approximately $39 – 107 million and an increase in the interest rate the state pays under the swap agreements, which would further reduce the cash available to the state to pay its obligations,” the filing said.
After the June 1 downgrades by Moody's and S&P Global Ratings, which dropped the state to BBB-minus, the spread expense on Illinois’ $600 million of floating-rate paper under a two-year direct placement rose to 3.45% from 2.95%. If one rating falls to junk, the fee increases to 5.45%. If two drop the state to junk, the spread rises to 645 basis points.
A fall to junk would trigger termination events on some state swaps. Termination is not triggered on the largest swap until a fall to BB. The $107 million figure cited is the total negative valuation.
If the budget impasse is not resolved by July 1, “that fact alone” likely will lead to a rating downgrade, regardless of the effective date of the court’s order, the state filing continued.
S&P warned “if lawmakers fail to reach agreement on a budget with provisions designed to reduce the state's structural deficit, it's likely we will again lower the ratings.”
Fitch Ratings, which has its BBB rating on negative watch, has said it views the July 1 beginning of the new fiscal year as a key marker for a downgrade.
The filing also argues that a July 1 delay would give the state “some additional time to determine how to comply with the court’s order” given that “the state’s cash flow crisis leaves defendants with no obvious way to satisfy plaintiffs’ request for relief.”
Investors and analysts are concerned about the impact of potential court actions sought by stakeholders starved for payment as the budget impasse nears a third fiscal year.
The latest court action stems from a consent decree reached two years ago with Medicaid recipients requiring the state to pay providers in a timely and expedited fashion to ensure that patients are not deprived of care. They returned seeking an order recently because the state is $2 billion behind.
“If the managed care organizations don’t get paid, doctors don’t get paid,” and recipients are in danger of losing access to essential health care because of the state delays, Thomas Yates of the Legal Counsel for Health Justice said after the Tuesday hearing.
“This court has the power and duty to enforce the federal consent decree by holding that payments to MCOs [managed care organizations], needed to maintain the required services to Medicaid beneficiaries, must take precedence over pure state obligations such as payments into the state pension system,” the plaintiffs' latest filing said.
About 90% of state spending is ongoing under continuing appropriations, consent decrees, and court orders. Under the original decree, most payments owed to Medicaid providers receive priority over general services but don’t fall into the category of “core priority” payments, with the exception of $160 million.
Other core expenses include $226 million in monthly debt service, $593 million in monthly pension payments, $370 million for payroll, and $270 million in state aid to school districts. Those and other categories total $2.1 billion monthly and consume about 90% of monthly revenues. Comptroller Susana Mendoza’s office has vouchers totaling $2.1 billion for payments owed to general Medicaid providers.
On the surface, an adverse state ruling would not appear to impact state GO repayment as the debt enjoys far-reaching protections under the GO Bond Act. Those protections extend beyond a reliance on general fund revenues to include all legally available revenue including special funds which combined held $10.8 billion as of May 30. The state also sets aside in monthly allotments the funds needed for debt service 12 months ahead of payment dates.
The escalating pressure caused by the budget delay could render those protections moot, analysts say.
"The complete collapse in willingness demonstrated by the state’s purely political (and thus avoidable) budget crisis suggests the potential for opportunistic rule changes and security diminution if general fund solvency continues to erode," Municipal Market Analytics wrote Monday in its weekly outlook.
“The priority given to debt service on Illinois' GO bonds makes them less vulnerable to nonpayment, but in our view the policy tradeoffs this entails are becoming starker. Without an enacted budget, we believe there is growing uncertainty as to the state's ongoing willingness to fund its GO debt service transfers, particularly in the event of economic deterioration,” S&P wrote in its downgrade report.