Operating on borrowed money

Operating on borrowed money

Vendors doing business with the state can turn to "qualified purchasers" for money when Illinois does not pay.

When the state of Illinois spends money it does not have, who makes up the difference?

For example, the state provides health and dental insurance coverage for University of Illinois employees and their dependents. If the state does not have the money to pay the insurance premiums, how do the insurance companies stay in business?

Here's how: Through the state, the vendor signs up for help from one of six qualified lenders that provide cash and wait to collect a generous interest payment later — compliments of the Illinois taxpayers.

Having a multiyear history of being a deadbeat, the state has set up two voluntary plans — the Vender Payment Program and the Vender Support Initiative — that allow these six approved companies to pay vendors most of the money they are owed.

The vendors benefit because the cash infusion keeps them in business. Further, they get the rest of their money once the state pays off the debt plus interest.

The lenders benefit because they get to keep interest — which accrues at as much as 1 percent per month.

But the taxpayers do not — paying an extravagant premium for the state's improvident ways.

Further, a recent article by Reuters raises the possibility that the unlimited lending programs could prove to be a "financial time bomb."

As the 17-month fiscal stalemate continues between Gov. Bruce Rauner and the Democrat-controlled General Assembly, state expenditures far exceed revenues. At the current red-ink pace, Illinois will have a nearly $8 billion deficit by June 30, 2017, further adding to the $10.5 billion stack of unpaid bills. One estimate predicts Illinois' debt will grow to $13.5 billion by next summer.

The generous interest penalties — 9 percent annually for health care providers, 12 percent a year for other vendors — have cost the taxpayers nearly $1 billion since 2008, according to the comptroller's office.

That figure is bad enough. It represents an onerous cost without any benefit for the public.

But that growing late-payment debt, Reuters reports, is further tainting the state's fragile credit rating.

"The state's negative credit outlook means its $26 billion of outstanding (general obligation) bonds could lurch closer to the junk level if the growing unpaid bill pile impairs its ability to provide essential services, affects debt payments and inflates its already huge $130 billion unfunded pension liability."

In other words, Illinois is sliding on a downward spiral of higher debts and interest charges. No responsible government would put itself in this fiscally dangerous position, but Illinois has. As a sovereign state, Illinois cannot declare bankruptcy, but default does become a possibility — as long as the state's budget standoff continues.

But the obscurity of these two programs raises other concerns.

Given the large sums being paid out, some of the lenders are backed by big banks, such as Citibank and Bank of America.

But political insiders are also involved.

Former Gov. Jim Edgar is chairman of Illinois Financing Partners LLC, which participates in both programs. Former Democratic Congressman Jerry Costello, a Springfield and Washington lobbyist, is the company's vice chairman, the Chicago Sun-Times reported last summer. Both men receive monthly stipends from Illinois Financing Partners and also have a 1 percent equity stake.

Another so-called "qualified purchaser" for both programs is Vendor Assistance Program, which was founded by Brian Hynes, a lobbyist and former Michael Madigan aide, and Patti Solis Doyle, a former Hillary Clinton campaign manager whose brother is a Chicago alderman. According to the Sun-Times, since 2011 when Pat Quinn was governor, the company has purchased $706 million in vendors' unpaid bills.

Defenders of the lending programs argue the third-party lending keeps "the wheels of commerce" turning.

But how much of the profits work their way back to Springfield in the form of campaign contributions?

"If the state ever did get their act together, this entity would go out of business," Edgar told the Sun-Times about his company. "Unfortunately, we're not there."

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