As Illinois Gov. Bruce Rauner and Democrats continue their game of chicken over the budget, a fire rages inside the state’s bank vault.
Day after day, the state operates without a balanced budget, and as a result, the state’s financial health continues to deteriorate as the backlog of unpaid bills, late fees and interest payments continue to skyrocket.
The state's backlog of bills has now surpassed a record $11 billion spread among close to 150,000 vouchers and will continue to get worse if the status quo doesn't change, according to current projections from the state Office of Management and Budget.
Meanwhile, the state's credit rating is sinking, raising borrowing costs.
Even the state's ability to earn interest with its own instruments is limited because it is forced to invest in short-term instruments, rather than higher-paying, longer-term investments, in the the event the state needs a quick infusion of cash.
“The state of Illinois is on fire,” Illinois Comptroller Susana Mendoza said. “We are in a dire fiscal crisis, and things are worse than they appear to be. Every day, we’re burning money at an unprecedented rate as a result of the governor not proposing a balanced budget and the Legislature not acting on it.”
Last year, former Comptroller Leslie Munger, whom Mendoza defeated in November’s election, warned the state's backlog of bills was growing at a rate of half a billion per month, and her projection was validated based upon the five-year forecast from the Governor’s Office of Management and Budget.
“By the end of this fiscal year, we’ll be in the $13 billion-plus range, almost hitting $14 billion,” Mendoza said. “There’s no great reason to think we’re not going to be looking at $20 billion in the next fiscal year.”
Even more worrisome, the forecast revealed that a lack of budgetary progress would lead to a $47.1 billion backlog in five years.
Interest and late fees
The lack of a budget does not mean the state doesn’t pay all of its bills.
Close to 90 percent are paid through consent decrees, court orders and appropriations, but the lack of on-time payments for the rest is exacerbating the state’s problem.
Of the number of eye-opening figures about Illinois’ mounting debt, interest and late fees catch Mendoza’s eye.
It is no secret that Illinois’ finances have been a mess since the turn of the century, but in the past six years alone, the state has accrued close to $1 billion in late penalties.
While 2016 accumulated $16 million in paid interest fees, fiscal year 2017 promises to be one of the state’s worst years for interest payments. The fiscal year closes June 30.
“In 2017, there have been $55 million in interest payments, and we’re only halfway there,” Mendoza said in an interview three weeks ago. “It’s very likely we’ll have passed the $100 million mark by the close of the fiscal year.”
In the short period since she made those remarks, interest on late payments has surpassed $83 million for the fiscal year thus far.
The State Prompt Payment Act, otherwise known as 30 ILCS 540, provides an interpretation of how the state accumulates interest.
Some bills, which must be considered “proper bills,” accumulate interest at a 1 percent rate, while health care providers accrue interest at a 9 percent rate.
By comparison, the current prime rate is 3.75 percent.
Mendoza also is quick to point out that the state does not make interest payments until the vouchers themselves are paid, thus compounding the state's payables further.
State group health insurance claims, which account for more than $4 billion in unpaid bills, are accumulating the bulk of late fees and interest.
By themselves, unpaid health insurance bills are estimated to accrue more than $200 million in interest fees for this fiscal year, and as these bills continue to go untouched, the interest continues to compound.
Although much of the focus on the effect of the budget impasse has centered on education and social services, the state’s financial condition has directly affected one of its revenue streams.
Like any business venture, Illinois Treasurer Michael Frerichs said his office’s goal is to maximize the state’s investments and profits, but without a budget, returns on investment are not what they could be.
“Through the first three quarters, we earned $47 million, which is a good number, but could have earned $21 million more,” Frerichs said, based upon past investment methods.
With figures for 2016 now updated, Frerichs said the state earned $68 million but could have been $30 million more.
As a result of unplanned fund sweeps and the need to pay court-ordered bills, Frerichs said, the state’s financial health has shifted the way it invests.
Instead of prioritizing long-term investments, which command higher interest rates, the state has had to commit funds to shorter-term investments so it can liquidate them if the state needs cash.
According to the Treasurer’s Office, the change in its portfolio costs the state $2.6 million per month in lost investment revenue.
Without a budget, Frerichs said, this trend will continue to grow and minimize the effectiveness of his office.
“With continued uncertainty, we continue to miss out on potential investment income,” Frerichs said.
Credit, bond ratings suffer
In addition to bill backlogs and lost investment opportunities, since 2001, Illinois credit and bond ratings have plummeted, making it the worst-rated state in the country.
Illinois’ credit rating — BBB by Standard and Poor’s, Baa2 by Moody’s and BBB-plus by Fitch — has declined to such a degree that it now hovers above junk status.
As such, every time the state issues general obligation bonds, they come with a higher yield, meaning a greater financial burden must be shouldered by taxpayers to account for higher interest.
When Illinois issued $550 million in general obligation bonds in June, Dr. Martin Luby, an associate professor at DePaul University, analyzed the true cost of Illinois' declining financial health and extra burden passed on taxpayers.
In what he dubbed the state’s “financial condition penalty” as part of his analysis for the University of Illinois Institute of Government and Public Affairs Fiscal Futures Project, Luby compared the difference in what it actually cost to issue the bonds and what it would have cost had they been sold at prices the state would have received 10 years ago when its credit rating was better.
Instead of receiving $575.9 million for its June 2016 bonds, Luby said the state could have received $645.5 million.
“This nearly $70 million financial condition penalty is an estimate of the cost to the state on the June 2016 Bonds as a result of the deterioration in its financial condition over the last 10 years,” Luby said.
In fact, his estimate was the state incurred a $12 million penalty in just the six months between last January and last June.
The state also is facing the possibility of more credit downgrades if there is no real progress, said Ted Hampton, a Moody's vice president and lead analyst for Illinois.
Hampton said that under a stopgap budget, it would be assumed that growth in the state’s structural deficit, operating fund liquidity pressures evident in a ballooning backlog of bills and a persistent and growing pension funding challenge would continue.
And as such, Hampton said, Moody's likely would continue to give the state a negative outlook as it did when it downgraded the state's bonds in June.
“We will have to assess the credit implications of any fiscal legislation enacted, whether it’s simply a stopgap measure or some broader package that contains reforms, recurring revenue enhancements and provisions for the coming fiscal year,” Hampton said in regard to the current legislative session. “Having said that, a stopgap budget, by definition, is unlikely to address the state’s long-term challenges, so it’s also unlikely to constitute real progress."
The state could get some respite by passing a budget, but Hampton suggested it would be years before the state could fully restore its credit rating.
“Our credit assessment will respond quickly to whatever reforms, revenue increases or other fiscal measures may be enacted, but that doesn’t mean the state’s ratings will immediately return to the very high levels occupied by other U.S. states, most of which are rated Aaa or Aa1,” Hampton said. “Even if legislators and the governor agree on a credit-positive plan — one that appears to address the state’s long-running pension funding and financial challenges — those challenges won’t be alleviated overnight. Restoration of the state’s credit standing will likely depend upon successful implementation of enacted measures over a period of years.”
Breathing life into statistics
Illinois problems have been known for years, and it’s easy to get caught up in all the numbers.
But Mendoza says those figures mask a human toll.
“We shouldn’t be looking at them as statistics on a spreadsheet," Mendoza said. "People’s lives are at stake.”