The creditors’ plight

April 26, 2016

By William Glasgall

I found your blog on Illinois’ unpaid bills interesting and informative. As of April 22, the state had run up a backlog of more than $6.7 billion of them, according to Comptroller Leslie Geissler Munger. As they wait to get paid, vendors to the state of Illinois are well aware that they are creditors--even though they may have less seniority than general obligation bondholders, whose debt service is guaranteed by the state’s Constitution. And like investors in the state’s debt, vendors also get compensation for lending their money to the government. As the Institute for Illinois’ Fiscal Stability recently observed:

Under the State Prompt Payment Act, interest accrues at 1% a month on “proper bills” that are not paid within 90 days. Proper bills are defined as those that include the information needed to process the payment. Other claims, including those from healthcare providers, accrue interest at 9% a year after 30 days under the Illinois Insurance Code.

Those monthly penalties add up fast. Since 2006, past-due bills have cost Illinois taxpayers $1 billion in interest and penalties, the institute says. To put that amount in perspective, $1 billion is about what Republican Governor Bruce Rauner proposed spending on the state Department of Aging in the current fiscal year’s budget, which has yet to be enacted. Payment of suppliers’ overdue bills is effectively being put in line ahead of fulfilling the state’s vast obligation to fund its retirement system. As of fiscal 2015, Illinois had run up a $119 billion deficit in pension funding, and the gap keeps mounting. When the state Supreme Court ruled in 2015 that former Governor Pat Quinn’s 2013 pension-reform law unconstitutionally reduced accrued as well as promised benefits, Justice Lloyd Karmeier observed that:

As long ago as 1917, a report commissioned by the General Assembly characterized the condition of State and municipal pension systems as “one of insolvency” and “moving toward a crisis” because of financial provisions which were “entirely inadequate for paying the stipulated pensions when due.”

When it sells general obligation debt to investors, Illinois is obliged by the state Bond Act to appropriate funds to repay the securities. In the case of funding pensions, however, the state Constitution protects “the benefits of membership in public pension systems not by dictating specific funding levels, but by safeguarding the benefits themselves,” Karmeier found.

In some local municipal bankruptcies, such as those in Detroit and Central Falls, Rhode Island, federal court judges have cut what governments owed for retirement obligations along with bond debt and suppliers’ accounts. States are not allowed to file for bankruptcy, but that doesn’t mean bills won’t pile up and be left for future taxpayers to pay even when budgets are said to be in balance.

Glasgall is director of state and local programs at the Volcker Alliance in New York.

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