Illinois' new bill backlog measures aren't the same as a budget solution

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CHICAGO – New Illinois laws to help it chip away at an $8.1 billion bill backlog and require the state to budget for interest on the backlog are Band-Aids for a state that needs major budget surgery,, Moody's Investors Service says.

The investment of state funds is one in a series of legislative measures backed by the state’s treasurer or comptroller “aimed at making the state’s management of a large backlog of unpaid bills less costly and more transparent,” Moody’s wrote this week in a commentary about new laws signed by Gov. Bruce Rauner earlier this summer.

Under Public Act 100-1107, Treasurer Michael Frerichs will free up as much as $2 billion of state investment funds for Comptroller Susana Mendoza to pay down bills under an intergovernmental agreement.

“This legislation will help the state to curtail further late penalty accruals, assuming the payment backlog remains at or below current levels,” Moody’s said.

A second law requires the administration to include interest cost of the backlog in the annual budget. The state accrued $1.14 billion in interest costs in 2017 and 2018, up from about $1 billion accrued over the previous 17 years.

The benefits, however, only go so far for a state that carries Moody’s lowest investment grade rating of Baa3, with a stable outlook.

“While demonstrating urgency to address the state’s chronic reliance on payment deferrals, these laws do not solve the underlying problem: a long-running lack of budget balance and the ability to defer bills from year to year,” Moody’s lead Illinois analyst Ted Hampton wrote.

“To fully eliminate the backlog without resorting to non-recurring tactics such as further bonding, the state would have to do something that the new laws do not require: achieve budget surpluses over the course of several years,” Hampton added.

Surpluses are not expected any time soon.

The current budget already is in the hole as it doesn’t account for $415 million in overdue court-ordered step pay raises. It could get deeper as the $38.5 billion general fund budget relies on $400 million in pension reform savings from programs yet to be implemented and $250 million from the sale of a state office building in downtown Chicago, a sale that has failed to materialize for several years. The state’s latest bond offering statement warned of a more than $1 billion structural gap going forward.

The bill backlog ballooned to more than $16 billion – a record -- as gridlock between Republican Gov. Bruce Rauner and the Democratic-controlled General Assembly left Illinois without a budget for two years. The stalemate broke in the summer of 2017 when a handful of GOP lawmakers broke ranks and joined Democrats in passing a budget and then overriding the governor’s veto.

The fiscal 2018 budget package included an income tax hike that generates more than $4.5 billion in revenue annually and authorized $6 billion of borrowing to pay down delinquent bills. The state sold premium bonds to raise another half billion. The state also leveraged the proceeds to secure more federal Medicaid matching dollars that made a further dent in the tab.

Rauner signed a fiscal 2019 budget in June. Market participants and civic watchdogs hailed the lack of gridlock while calling the spending plan flawed due to uncertain revenues source, the lack of any material action to deal with a $129 billion unfunded pension tab, and absence of a plan to bring down the backlog.

Under the investment program, the treasurer's and comptroller's offices enter into an intergovernmental agreement for increments of $50 million to $250 million of state money to cover general operating bills or health-related bills with repayment terms and maturities outlined in the agreement. Interest rates will be linked to short-term benchmark such as the federal funds rate.

Frerichs said Wednesday he's finalizing details of the intergovernmental agreement and would then post details on the treasurer's website.

"This is a win-win for the state. Not only will taxpayers see tens of millions in savings on interest penalties but also will benefit from increased investment earnings each year," Frerichs said, with savings estimated at up to $100 million for every $1 billion invested.

The rate will fall far under the current 9% to 12% rates paid on some state bills to social service agencies and healthcare providers. It’s also expected to yield a higher return for the state which now averages about 2.25% on its fixed-income investments. No interest is paid on overdue aid to local governments, universities, and transportation systems.

While positive benefits are expected, Moody’s warns a downside is the possible dampening of “the current urgency to address the state's fiscal challenges.”

Budgeting for the interest costs will improve state transparency but Moody’s warns it may be hard to implement because of difficulties calculating the figure and that it will address a comparatively small portion of the backlog.

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State budgets State and local finance State of Illinois Illinois