State of the State: Backlog of Unpaid Bills Vexes Legislators Again This Fiscal Year
About this time two years ago, I was working on one of my first big assignments for this magazine after I had come aboard as Capitol bureau chief. The article was on the state’s backlog of unpaid bills. At the time, the total of overdue payments to schools, universities and the state’s vendors was $3.5 billion. The oldest bills had sat unpaid for six months.
When I wrote that article, which was published in the March 2010 Illinois Issues, business owners and social service providers said they had to take out loans or refinance their companies just to stay afloat while they waited for payments from the state. They laid off workers and cut costs. Some even closed their doors. The backlog seemed to be at a tipping point, ready to tumble into a full-blown crisis any day. Instead, it now seems to have become an unfortunate fact of life in our state. Not paying bills on time is an underlying problem that has faded into the background under the din of all the other news and crisis-to-crisis problem-solving. Stiffing vendors has become the norm in an Illinois government struggling to get back on its feet after facing down a budget deficit that was once almost $15 billion.
Comptroller Judy Baar Topinka summed up the situation. “Now it is perpetual emergency, and literally, the nonpayment of vendors is almost like a line item in the budget. We almost work on the basis that the private sector is going to carry the load for the state.”
According to a recent report from Topinka, the amount of overdue bills now stands at more than $4 billion. Add in unpaid corporate tax returns, employee health care costs, approximately $2 billion in Medicaid bills that the budget will push into next fiscal year and other expenses, and the state’s outstanding debt — not including traditional borrowing — sits at about $8.5 billion. Bills from last year took more than a $5 billion bite out of revenues for Fiscal Year 2012. Topinka doesn’t expect the number to improve in the near future. “Even if current revenue projections hold, the backlog at [the comptroller’s office] is not expected to change much from last year,” Topinka’s report said. Her predecessor, Dan Hynes, also released his share of reports warning about the dire consequences of the backlog eating into the revenues of future fiscal years.
A large chunk of money that went to pay late bills — about $1.2 billion according to a report from Hynes in October 2010 — came from the one-time revenue sources of a tax amnesty plan and bonds sold against a settlement with tobacco companies. Those two sources allowed the state to pay off all the bills left over from FY 2010 days before the extended lapse period ended in December of that calendar year. That December, Quinn said: “We also have to pay [FY2011] and beyond — [FY2012], [FY2013] and you name it. So we have to have a plan in Illinois that gets us back on sure footing when it comes to our finances, and that’s what I’m working on now with legislators of both parties.”
Last year’s income tax increase and budget cuts have gotten the state on surer financial footing. However, a comprehensive plan to address the backlog has yet to gel.
A proposal to borrow the money to pay off the backlog, with a percentage of the revenues from the income tax increase earmarked to make payments on the borrowing, was pitched in tandem with the increase, but it went nowhere. Under the current budget, any additional revenue that comes in beyond the revenue projection that the budget is based on is supposed to go to pay down the backlog. Gov. Pat Quinn’s budget office estimates that about $1 billion in bills has been paid off this fiscal year with money from the income tax increase.
A three-year projection from Quinn’s budget office estimates that there will only be about $200 million to spend on the backlog next fiscal year and $800 million in FY 2014. The same projection shows the state running a deficit of more than $800 million in FY 2015. Since last year, Quinn has continued to pitch borrowing to “restructure” the debt the state owes to vendors, schools and others, but the governor’s broken-record routine falls on deaf ears in the legislature.
However, a series of stories from the Associated Press last fall made the backlog once again the focus of scrutiny, and in 2012, a bond rating downgrade and a negative report from the Civic Federation has thrust it back into the spotlight.
Moody’s rating agency downgraded the state’s bond rating to the worst in the country. The agency’s report cited the backlog, as well as the state’s unfunded pension liability, as the reasons for the rating.
Standard and Poor’s did not follow suit, but it did give Illinois a negative outlook and warned that failure to address the stack of overdue bills could lead to a downgrade.
The Chicago-based Civic Federation’s report projected that the backlog would reach $9.2 billion by the end of the current fiscal year, and if no action were taken, the total would climb to $34.8 billion by the end of FY 2017.
The Civic Federation opposes borrowing to pay down the backlog. It has called on Quinn and lawmakers to enact Medicaid and pension reforms, both issues Quinn and all four legislative leaders list as priorities for the upcoming session.
But those savings, if they come to be, would take time to materialize. What to do about that staggering pile of bills in the meantime? Lawmakers balked when Quinn pitched a plan again last year to borrow $8.5 billion to restructure the state’s debts. Some were — and remain — fundamentally opposed to any new borrowing. The state had borrowed to make the pension payment for the last two years. Borrowing to cover what is in essence operating expenses was reminiscent of the one-time-only revenue schemes and new-programs-now, pay-later (or never) budgeting tactics of the previous administration.
But it is hard to deny the simple math that the state would pay less in interest costs by borrowing to pay down the backlog now.
“There is somewhere between a quarter and a third of those unpaid bills that the state of Illinois is paying 12 percent interest on. We can go out into the bond market, as we did the last time, and the state can sell bonds at below 4 percent. So we’re paying 12 percent; we can do bonding for under 4 percent,” says Sen. John Sullivan, who brought a smaller $1.5 billion borrowing bill for a vote in the Senate last year to see it get only 19 “yes” votes of the 36 needed.
As Sullivan, a Rushville Democrat, has been patiently droning for months, there is room for compromise in a plan to pay off the backlog. The borrowing could be scaled back and coupled with cuts. “Every bill does need to be paid,” Sullivan said last year. “But maybe we need to operate under a 30- to-60-day backlog. That’s certainly better than where we are now. It’s an improvement.” Sullivan says that this year, he plans to pursue a borrowing package to address the bills on which the state is paying 12 percent interest.
Senate President John Cullerton has often said that the infusion of cash to vendors and schools would be an economic stimulus. They would then pay off their debts, buy things and maybe even bring back a few laid-off employees, or at least think twice about laying off more workers.
Republican House Minority Leader Tom Cross said in 2011 that he planned to talk with Quinn and the other legislative leaders about plans to pay down the bills, and he was not ruling out borrowing.
“We want our bills paid. We know that vendors need to be paid,” Cross said early last year. “One of the things that we’re going to talk about is maybe the size of that borrowing [and] the length. We’re going to talk about some cuts, and we’re going to talk about some other fundamental things that we need to talk about.”
But since then, Republicans have dug in their heels. Sen. Matt Murphy, a Palatine Republican, said after Quinn’s State of the State address in February, “The borrowing is dead on arrival.”
And who can blame them? As they see it, if the state keeps taking the easy way out, it can ignore crises and avoid tough choices such as cuts. Sometimes you have to stare down a bad situation to force difficult decisions. The tax increase was passed without any of the accompanying cuts or reforms Republicans wanted, and they are running out of the kind of pressure situations a minority party often needs to push change.
But in this case, the victims of staring down the crisis are schools, businesses and social service providers who do business with the state, and the backlog has been a crisis for at least two years without directly forcing any policy change. Lawmakers walked away last year with a budget that had no real comprehensive plan for addressing it.
Borrowing is not the only option, though it seems unlikely that the legislature would agree on the about $4 billion or so in cuts needed to free up the money to pay off just the bills owed to vendors and schools. If cuts are made to address the backlog, the money should be directed specifically to that purpose. Those owed money by the state have been waiting at the back of the line for too long.
No matter what solution is found, legislators must work on the issue in good faith and address the backlog. Members from both parties claim to have learned from the state’s budget fiasco that letting an underlying crisis drag on is a recipe for disaster. You never know when the next economic setback might strike, strangling state revenues. It was a combination of ignoring realities and the economic downturn that allowed the backlog to grow to such unruly heights in the first place. Legislators should take the opportunity to act while the issue is once again in the spotlight. The state cannot afford another budget where the backlog of unpaid bills is an afterthought.
Illinois Issues, March 2012