Illinois’ establishment of a program linking state vendors with private investors willing to purchase overdue vouchers underscores the severity of its chronic bill-payment deferrals, but shouldn’t impact its credit standing, according to a recent report from Moody’s Investors Service.
Moody’s — which rates Illinois A1 with a negative outlook — concluded in its report on the program that the transactions won’t change the state’s obligation on its payables and ultimately they won’t alleviate liquidity pressures.
The state’s Department of Human Services set up the pilot program in October, making up to $100 million in private cash available to cover late payments from various lenders, including commercial and investment banks. Officials expect the capital will be available to cover up to $2.5 billion of eligible bills under an expanded program. In exchange, lenders collect the 1% monthly interest payment the state otherwise would owe the vendor after 60 days.
Only the payables subject to the 1% monthly late-payment fine are eligible for the program. Illinois closed out fiscal 2010 on June 30 with $6.4 billion of unpaid bills. The state could close the current fiscal year owing $8 billion if no action is taken. The General Assembly is expected to begin considering a tax increase and borrowing plan that could help pay off overdue bills.
Under the program, an eligible vendor can sell its outstanding receivables to a qualified purchaser who in turn pays 100% of the voucher. The vendor then 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.
The program “will not create financial obligations with legal claims on state revenues similar to the claim held by bondholders,” Moody’s wrote. “Instead, it can be viewed as shifting the ownership of a portion of the state’s accounts payable, which will remain an operating expense.”
The program is aimed at aiding vendors. Moody’s said it’s not expected to alleviate credit pressures. The growing reliance of Illinois on payment deferrals contributed to Moody’s decision in September to revise its outlook to negative.
Moody’s also said the program’s creation was not driven by a lack of market access for a cash-flow issue, given the state’s success in recent bond transactions, albeit at higher interest rates. Illinois does face political hurdles in selling short-term certificates because the comptroller and treasurer both must approve the sale.
