Interest on the Illinois bill backlog remains a sore spot for the state's creditors

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CHICAGO – The fiscal toll of the overdue bills that piled up during Illinois' two years without a budget and the lingering effects that are threatening private lender debt programs are the subject of a new report and testimony in Springfield this week.

The state’s $1.14 billion in interest rate penalties since Gov. Bruce Rauner took office in January 2015 – when he inherited a roughly $5 billion backlog – and through the budget impasse that ended last July exceeded by $100 million the total paid out over the last four administrations during an 18-year period.

“This puts a massive price tag on missed opportunities due to a failure in leadership,” Illinois Comptroller Susana Mendoza said in a statement accompanying the release of the April debt transparency report and a special report on late payment interest penalties that looks in greater detail who is owed interest penalties.

The comparison accentuates the toll, which Mendoza has sought to highlight since taking office in December 2016. Mendoza is a Democrat and supports the Republican governor’s general election opponent, Democrat J.B. Pritzker.

Late interest penalties pending in the office total $553 million with 97% owed on medical bills for employees. About 55% is vouchered to third-party lenders who have purchased the bills.

The Rauner administration put the blame on Democrats.

“Illinois has been plagued by unbalanced budgets and out-of-control spending for years. Last spring, yet again, instead of coming together to negotiate a balanced budget and reforms, Democrats passed a budget that was $1.7 billion out of balance – over the governor’s veto,” said Rauner spokeswoman Rachel Bold.

The state is hard pressed to further bring down the bill backlog even with higher income tax rates approved with the budget package. The state’s $6 billion in borrowing that leveraged federal matching Medicaid funds helped cut the backlog in half from its high of more than $16 billion last fall.

The vendor provider programs are “an important lifeline to state vendors that struggled during the budget impasse to meet operational costs for services already rendered” and while important administrative tools, “their use contributed to the extreme length of the budget impasse, which ultimately resulted in a record accumulation of late payment interest penalties,” the comptroller's report says.

The report’s release came a day after the legislature’s Commission on Government Forecasting and Accountability was warned by the four firms that participate in the vendor payment programs that state delays in making good on the interest rate penalty payments put the programs at risk.

The program allows the private lenders – Vendor Assistance Program, Vendor Capital Finance LLC, PayPlant, and Illinois Finance Partners – to purchase much of a vendor’s overdue bill, allowing employee health providers and social service providers and other vendors to collect the cash some need to stay afloat.

The state is making a dent in regular principal payments but the state is far behind on interest penalties. The state prompt payment interest penalty runs as high as 12% and it provides the incentive for the lenders to participate. Without payment the firms’ access to capital from their own private lending partners could dry up and “kill the program,” one firm warned.

Brian Hynes, founder of VAP, is owed $250 million in penalty payments.

“We remain committed to work with the state but we are stressed,” said Gregory Gac of Illinois Financing Partners. The firm is owed more than $115 million in interest penalties and payments are needed to hold on to its capital lenders.

“If we get to a point where there is another impasse … there may be less interest in providing liquidity to the state,” said Le Chen, of Vendor Capital Finance LLC.

The lenders said they have considered taking legal action but no such move is imminent.

Mendoza’s office responded, saying that while the bill backlog has been cut in half her office remains in triage mode and it’s a matter of prioritizing who gets paid. Debt service, public schools, pension payments, and Medicaid providers receive top priority. The state paid out $143 million in calendar year 2017 and $69.4 million so far this year in interest penalties.

“Providers and vendors all over the state are still experiencing payment delays,” said Mendoza representative Jamey Dunn. “The comptroller has been clear that given these pressures, she's prioritizing funding for programs that assist the state’s most vulnerable residents and education funding."

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