Illinois Comptroller Susana Mendoza is touting a huge decrease in the state’s backlog of unpaid bills as a “remarkable” achievement, citing her office’s “daily diligent management” of cash flow. This would be like me bragging about reducing my credit-card debt after I took out loans to pay down my balances and received an unexpected bonus.
In late 2017, when then-Gov. Bruce Rauner and the Legislature could not reach a budget deal, the state’s backlog of unpaid bills reached $16.7 billion. The bills included amounts owed to hospitals, schools, nonprofits, landlords and other vendors, who had to wait months to get paid. In essence, these vendors were lending money to the state to keep it afloat.
Most of this backlog can be attributed to one of the many loopholes in the state’s balanced-budget requirements, which says its “funds available” must equal its “expenditures.” Notice it doesn’t say revenues must equal expenses. This wording allows the Legislature to include in budget calculations only checks that are written and not all the money that is due.
If the state receives a bill from a vendor, it doesn’t have to be counted in budget calculations until the check is written. So the state can “balance” its budget by just not paying its bills, resulting in the backlog.
Soon, vendors, who get 12 percent interest per year on past-due bills, start to complain about not getting paid, so the state borrows money to pay down the backlog. When the state takes out loans, that money becomes “funds available” and can be used to balance the budget. In fall 2017, the state’s backlog of bills dropped dramatically when it issued bonds for $6 billion.
When the pandemic hit, the state needed money as its bill backlog had gone up again because of lost revenue and extra COVID-19 expenses. Most likely due to Illinois’ bad creditworthiness, the state didn’t want to issue debt through the municipal bond market, so it was the only state to use the special Federal Reserve loan program called the Municipal Liquidity Facility.
The state borrowed $1.2 billion from the Federal Reserve last spring and $2 billion in December. There was a corresponding drop in its backlog of bills. These loans are short-term and need to be paid back in three years. In April 2021, the comptroller’s office received more tax revenue than expected, which allowed for more money to be put towards paying down the backlog.
Paying down the large backlog of bills and managing cash flow becomes a great deal easier when you borrow money and have unexpected revenue coming in.
To give credit where credit is due, Mendoza is currently calling for fiscal restraint and asking the federal government to allow the state to use incoming federal coronavirus relief money to pay off short-term borrowing, including the Federal Reserve loans.
If this isn’t allowed, the money will most likely be spent, and to pay back the Fed, the governor and Legislature will have to do something unheard of. Over the next three years, the state would have to not only truly balance the budget, but also spend $3 billion to $4 billion less than it collects in revenue.
Or the politicians could choose to kick the hundreds of billions of dollars in debt down the road by borrowing more money to pay the Federal Reserve loans, or they could start delaying the payment of bills again.