March 23, 2010
Governor Pat Quinn’s recommended FY2011 budget, issued on March 10, 2010, proposes borrowing $4.7 billion to cover FY2011’s projected operating deficit. No details about the Governor’s borrowing plan have yet been made available. However, the budget proposal states that borrowing would be preferable to increasing the State of Illinois’ backlog of unpaid bills by roughly the same amount because unpaid bills cause financial stress for vendors and require the State to pay 1% a month in interest penalties.
The interest penalty requirement is contained in the State Prompt Payment Act. Under the Act, the State must pay a penalty of 1% a month if a vendor’s bill is not paid within 60 days. The penalty was changed to 2% a month for Medicaid bills as of January 1, 2010.
The State’s unpaid bills grew from $975 million at the end of FY2008 to approximately $4.0 billion at the end of FY2009, as detailed in the Civic Federation’s Fiscal Rehabilitation Plan report. Unpaid bills are expected to reach $6.1 billion at the end of FY2010, according to the Governor’s budget recommendation.
The table below shows that the State paid a total of $24.0 million in interest penalties due to late bills in FY2008 and $31.2 million in FY2009, according to the Illinois State Comptroller’s Office. Although total unpaid bills more than quadrupled between year-end FY2008 and year-end FY2009, interest penalties increased by 30.0%. The fact that the increase in outstanding bills far outpaced the increase in penalties paid is evidence that the Comptroller’s Office manages the bill payment cycle in an attempt to keep overdue bills under 60 days.
As of March 2010, interest penalties on overdue bills for FY2010 totaled $6.4 million. Data from the Comptroller’s Office show that 72% of those penalties, or $4.6 million, were paid to healthcare providers who received late payments from the State’s employee group insurance plan. Under the State’s traditional health insurance plan, it now takes 203 days for the State to pay preferred providers and 231 days to pay non-preferred providers, according to a new report by the General Assembly’s Commission on Government Forecasting and Accountability. There were roughly $692 million of unpaid bills for participants in both the traditional plan and the State’s managed care plans.
There are currently $4.3 billion in unpaid bills outstanding. Bill backlogs are expected to grow as the State is required to use available cash to repay $2.25 billion in short-term loans—plus interest—obtained in May and August of 2009 and due to be repaid by the end of FY2010. The first payment was due on March 23, 2010.
Even if the State borrows $4.7 billion to cover the projected FY2011 operating deficit, it is still expected to carry over into FY2012 most of its accumulated unpaid bills from FY2010. Governor Quinn has suggested that a 1 percentage point increase in the State’s individual income tax rate, from 3% to 4%, could be used to eliminate recommended cuts of $1.3 billion in the education budget and to pay down outstanding bills to school districts and universities. The Commission on Government Forecasting and Accountability recently estimated that such a tax increase would generate an additional $2.8 billion in FY2011 if it were effective on July 1, 2010. The State currently owes roughly $900 million to colleges and universities and $890 million to school districts.
The cost of any additional borrowing to cover the State’s operating deficit cannot yet be determined. The Governor’s budget recommendation describes the borrowing as voucher payment notes, which it defines as a series of notes to pay specific vouchers during the fiscal year. However, no information has been released about the anticipated terms or debt service costs of any borrowing.
As previously discussed in this blog, borrowing to pay for operations does not solve the State’s current fiscal crisis. Instead, it pushes current liabilities into future years, reducing the General Funds available for operations in subsequent years due to increases in the State’s required debt service payments. The Civic Federation also opposes any increase in unpaid bills. To read about the Civic Federation’s plan for the State’s FY2011 budget, visit the Fiscal Rehabilitation Plan webpage.