* This “compromise” borrowing plan is picking up some Republican steam since it was first floated by Treasurer Dan Rutherford last month. Springfield’s three state legislators have signed on…
Quinn’ latest proposal, which he raised with legislative leaders last week, is to borrow $4.5 billion and repay it over seven years.
All three local lawmakers said they’re open to some type of borrowing plan, but with conditions.
“We would be willing to look at that if it is not long term, if it is a means to an end,” Bomke said.
By short term, the lawmakers said the money would have to be repaid in a year. Beyond that, Quinn needs to specify in detail how the borrowed money will be used, they said.
* Newspaper editorial boards have been up in arms about the General Assembly’s failure to act last week on a plan to deal with the state’s past-due bills. For instance, here’s the Bloomington Pantagraph…
But after a series of articles by The Associated Press and member newspapers, including The Pantagraph, showing the real harm being caused to small businesses, social service agencies, school districts and others by deadbeat Illinois’ delayed bill payments, lawmakers did absolutely nothing. The matter wasn’t even on the agenda for the governor or state lawmakers.
House Speaker Mike Madigan and Senate President John Cullerton told an Associated Press reporter they are waiting for signs of cooperation from Republicans.
Meanwhile, those owed billions of dollars by the state are waiting for signs of … well … signs of anything from Springfield.
Actually, some can’t wait any longer. They have laid off employees, cut programs, slashed expenses — you know, taken the serious actions that the state itself should be taking.
The Pantagraph did not endorse a specific plan, or even a direction. The paper just demanded some sort of action. Borrowing for a year may look like action, but it doesn’t really anything other than rearrange the deck chairs.
Nobody, but nobody, has proposed a plan to pay off these debts in a single year. If the state borrowed $4.5 billion for twelve months it would be almost right back where it started at the end of that time period because paying off the bond would require delaying payments to vendors and others or making drastic budget cuts that nobody has shown a real willingness beyond a press release to support.
These past-due bills have to be paid off over time, either through gradual budget cuts and perhaps new revenues, or via borrowing from the market. A single year of borrowing will not work.
*** UPDATE *** Comptroller Judy Baar Topinka also admits that the overdue bills will take years to pay off, but she’s still opposed to borrowing on the markets, apparently preferring to borrow from vendors…
Ms Topinka reckons that if budgets are frozen, Illinois could pay off its backlog within four years. She opposes the Democrats’ plan to issue more bonds to pay for pension and other obligations, since unlike the unpaid bills, they would incur interest – even though she admits transferring the debt from service providers to bondholders would be fairer.
“I’m not going to tell you this is a good way of doing business,” she says. “It’s awful. We’re trying to find a better way to build this mousetrap. But we have to play catch-up, so we can’t add to the problem.”
- Ahoy - Friday, Nov 4, 11 @ 10:18 am:
–To vote on something that is not earmarked is irresponsible– Brauer
What? The debt restructuring plan was “earmarked” for the late payments. I don’t think anyone in the legislature has ever proposed the idea of a blank bonding check. So why are they discussing it?
If the three legislators would support a one year, $4.5 billion “short-term” bonding bill, then they should introduce it. Let’s let the discussion begin on such a dumb idea which is essentially doing nothing.
- Bill White - Friday, Nov 4, 11 @ 10:21 am:
A refinance of short term debt bearing a high interest rate with long term debt at a lower interest rate (provided we do not increase the total amount due) is something I believe Illinois should do.
Why is it fiscally prudent to pay 24% annual interest on the state’s credit card rather than 6% annual interest on a bill consolidation loan?
- anon - Friday, Nov 4, 11 @ 10:32 am:
Do what Rich suggested “refinance” the $1.7 Billion owed to Private businesses at a lower rate hopefully before Christmas. This would pump some money into folks checks, economy and increased revenue back to the state and local Governments.
- Reality Check - Friday, Nov 4, 11 @ 10:33 am:
[Topinka] opposes the Democrats’ plan to issue more bonds to pay for pension and other obligations, since unlike the unpaid bills, they would incur interest
In what world don’t these debts accrue interest? Interest on the pension debt is 8.5% per year. Most debts to vendors accrue 12% APR, others 24%.
What is she thinking?
- Rich Miller - Friday, Nov 4, 11 @ 10:35 am:
===Most debts to vendors accrue 12% APR, others 24%.===
Keep in mind that Illinois extended its lapse period to the end of December.
- Logic not emotion - Friday, Nov 4, 11 @ 10:41 am:
I’m not sure what the rules are; but I’m pretty certain that many the state owes hundreds of thousands to are not receiving any interest. Maybe someone with actual detailed knowledge can post details or links since the interest issue seems to be a major point of contention for both sides.
- walkinfool - Friday, Nov 4, 11 @ 10:42 am:
At least the fools have moved off the “no new borrowing” stance.
Perhaps they can now be made to understand arithmetic, and consider what the more responsible legislators have been proposing for debt restructuring and paying off the overdue bills, while capping spending, over the next few years.
- TwoFeetThick - Friday, Nov 4, 11 @ 10:43 am:
Ms. Topinka is contorting herself into impossible shapes in an attempt to toe the party line. Those unpaid bills to vendors DO incur interest, as has been pointed out here many times. See the Illinois Prompt Payment Act (30 ILCS 540).
- Raising Kane - Friday, Nov 4, 11 @ 10:45 am:
Most debt is not to vendors, its transfers that are not eligible for prompt pay interest. So, its not really a 12% vs. 8.5% argument because you would be paying the 8.5% on everything as opposed to the 12% on only a fraction of the debt.
- Bill White - Friday, Nov 4, 11 @ 10:56 am:
Not paying vendors also hurts the Illinois business climate.
Even if the net interest rate differential arising from a refinance using long term bonds were zero (by blending 12% or 24% debt with those being stiffed without interest) paying all those unpaid vendors in cash would offer a very real stimulus to the Illinois economy.
However I still believe a bill consolidation plan could be crafted that would pay lower interest costs with greater principal payments to vendors without increasing the total debt owed by the State.
- Ahoy - Friday, Nov 4, 11 @ 10:59 am:
The interest that was figured for SB 342 - 345 (the Senate debt restructuring bills) was 3.5% and set out a 7 year payment plan to pay off the bonds (those owed money would be paid).
I am perfectly fine with a 4 year payment plan, but why not finance through a lending institution instead of businesses, service providers and local governments? The line of thinking right now by Republican’s is just plain dumb and selfish. Why use a bank for lending when you can just screw the little guy?
- Logic not emotion - Friday, Nov 4, 11 @ 11:23 am:
OK… I’ve reviewed the prompt payment act. I don’t know if it is that “grants” are considered “transfers” instead of payments or that “social service providers” are not considered “vendors”; but I am pretty certain that interest is not being paid on past due grant payments to many social service providers. I don’t know the percentage of state’s debt to those parties; but one cannot assume that state is paying interest on the full extent of its past due payments.
- dupage dan - Friday, Nov 4, 11 @ 11:24 am:
I think the GOP believes that by holding the dems feet to the fire the GOP will be able to force fiscal responsibility on the dems. While I believe that by borrowing to pay off the bills will result in more profligate spending by this irresponsible gov’t culture I am upset that the vendors are getting stiffed, which hurts many folk whose pain we may not see everyday.
Not a pretty picture.
- wordslinger - Friday, Nov 4, 11 @ 11:29 am:
DD, spin away. The fact is, the GOP of today is content to be a deadbeat. They didn’t used to be that way.
- TwoFeetThick - Friday, Nov 4, 11 @ 11:51 am:
@Logic not emotion
So, are you saying that if all vendors aren’t owed interest it’s ok to keep stiffing them? Go to the SJR’s Deadbeat Illinois database (Associated Press analysis). There you will see that the State owes $17.3 million in interest under the Prompt Payment Act. That certainly doesn’t look free to me. It looks like a colossal waste of State resources. I would think that Republicans would be all about doing anything to reduce the amount of money the State is wasting, since they spend so much time talking about it. If borrowing at a lower interest rate than we’re already paying would save money, then how can they not be in favor of it? The borrowing has already happened.
We saw the same thing play out nationally over the debt ceiling debate, when Republicans held a gun to the nation’s head and threatened to blow up the economy rather than borrow money to pay for bills that have already been incurred.
This stuff is not rocket science. And a real fiscal conservative would not be ok with bailing on financial obligations.
- Not Judy - Friday, Nov 4, 11 @ 12:14 pm:
Glad I voted for Blago for governor in the election of 2006 instead of Judy!
Her position here is very harmful to the people of Illinois.
- steve schnorf - Friday, Nov 4, 11 @ 12:19 pm:
us=1 year, them=7 years; sounds like the start of negotiations to me.
- Been There - Friday, Nov 4, 11 @ 12:19 pm:
===since unlike the unpaid bills, they would incur interest====
Obviously some obligations are incurring interest and some, like the grants, probably not. But my guess is that a lot of these businesses and service providers might even accept a discount to get paid now (and stay in business). Of course many of the businesses may have already factored their invoices and the loan companies are just sitting back waiting to be paid.
- Raising Kane - Friday, Nov 4, 11 @ 12:32 pm:
Yeah, Blago wasnt harmful to Illinois at all.
And twofeetthick,on the math of things, going to market to borrow will cost more than paying prompt pay penalties. First, prompt pay doesnt kick in until 90 days after a bill submitted and substantiated. So, in essence the first 90 days are interest free. Additionally, an estimated 2/3 of the bill backlog does not qualify for prompt pay. So, it would acutally cost us more to go to market to borrow.
That isn’t saying its right thing to do that but Dupage Dan makes the point that most Republicans do which is that every time the state has freed up money through borrowing, base spending has grown. The most infamous example was when Blago got to skip the pension payments and took those savings to help create more costly programs. That is why many Republicans oppose borrowing to pay off the backlog.
- bored now - Friday, Nov 4, 11 @ 12:54 pm:
can we get republican members of the legislature to support a complete and total shutdown of illinois government facilities in their districts (including their district offices) until all our bills are paid off and we have a balanced budget for two consecutive years??? wouldn’t that be the least they could do???
- Ahoy - Friday, Nov 4, 11 @ 1:01 pm:
–The most infamous example was when Blago got to skip the pension payments and took those savings to help create more costly programs. –
I don’t see the relevance here. Right now, they’re just ignoring the back-log of bills and the year to year deficit. This would at least make them budget the bond payments so it wouldn’t free up money for new spending. In fact that’s why Chicago Senate Democrats didn’t want to vote for SB 342 in May, because they knew it would reduce the amount they could spend.
I love Bored Now’s comment.
- CircularFiringSquad - Friday, Nov 4, 11 @ 1:05 pm:
Does JBT prefer paying prompt pay interest (+12%) over govt paper rate ( less than 2%) wonder why
- Raising Kane - Friday, Nov 4, 11 @ 1:12 pm:
Ahoy, your right if you only borrow for a couple of years so the bond payments are high enough to absorb all the freed up money associated with the bonding. But a 7 year time-horizon (which is what has been discussed) would not do that.
And again, borrowing on the open market would cost an estimated 100M a year more than paying the bills by limiting the growth of the budget and using revenue growth to pay down the debt over time.
- Logic not emotion - Friday, Nov 4, 11 @ 1:14 pm:
twofeetthick: That is certainly not what I was saying. I think the slow payments are poor practice. What I was saying is that we cannot just make a blanket statement or assumption that the state is paying interest on all its debts and argue for cheaper rate by borrowing.
Raising Kane: Thanks for the info. The 90 days & 2/3rds are the type of info I was seeking. I would love to see links to actual rules.
On the surface, borrowing at cheaper interest rates makes sense. Given history and their lack of legislative control, I can understand why Repubs would be dubious of potential savings being realized. Once bitten, twice shy.
- Raising Kane - Friday, Nov 4, 11 @ 1:17 pm:
Circular, again prompt pay doesnt kick in until 90 days after the bill has been accepted. Only about 1/3 of the debt is eligible for prompt pay. For instance, in 2011 prompt pay penaties are about 30M. To borrow 6 billion at 3.5% interest would cost about 210M. That that would be the “why”.
- Rich Miller - Friday, Nov 4, 11 @ 1:17 pm:
===And again, borrowing on the open market would cost an estimated 100M a year more than paying the bills by limiting the growth of the budget and using revenue growth to pay down the debt over time. ===
But you also have to weigh the stark immorality of borrowing from vendors, providers, schools, universities, transit districts, etc.
- Rich Miller - Friday, Nov 4, 11 @ 1:21 pm:
…In other words, it can’t always be all about bean counting.
- Raising Kane - Friday, Nov 4, 11 @ 1:23 pm:
Perhaps not, but failure to count the beans is what got us into this mess in the first place.
- Shemp - Friday, Nov 4, 11 @ 1:25 pm:
Fiscally, it makes sense and I could get behind more borrowing to get vendors and local governments paid. However, I have no faith that the General Assembly wouldn’t just put the vendors in the same position 18-24 months later. They’d again behind in payments from the State and we’d all be on the hook for even more debt.
- Bill White - Friday, Nov 4, 11 @ 1:35 pm:
Perhaps a compromise plan could be:
Borrow just enough to retire all prompt pay debt that is currently accruing interest. That will clearly save interest costs.
- Logic not emotion - Friday, Nov 4, 11 @ 2:03 pm:
Bill White: That is too logical!
Would be a good initial compromise though.
Question: Why should some debts be subject to prompt pay and others not?
- bored now - Friday, Nov 4, 11 @ 2:10 pm:
it really is bizarre that we seem to think it’s okay to “borrow” from the vendors (another euphemism might be stealing) but it’s not okay to borrow from the markets. this is just another place where i know that people who argue that “government should be more like business” are full of #@(!. either they don’t have real experience in owning a business or they are hypocrites. many, many, many businesses go into the short term markets to borrow for things like payroll (and the fact that small businesses are struggling in getting these kinds of short-term loans is one of the things holding back the economy); if someone *really* believes that government should be run more like a business, then this kind of short-term borrowing would be acceptable. but it’s not. i always suspect that those making this argument (that governments should be run more like a business) don’t really have much experience in owning and operating a business (let alone making a payroll)…
- Ahoy - Friday, Nov 4, 11 @ 3:05 pm:
Raising Kane, if I may make a couple points about the $100 million. First of all I agree with Rich, that this is immoral and not all about the beans. But, if you want to talk about counting beans, you have to count all of them, not just the prompt payment penalties. Here are the beans I count:
1. Prompt Payment Penalty does cost money. I believe it cost the state $60 million in the FY 2010 budget. I also believe this is the number the Senate Republicans used during their budget process conference to nowhere.
2. You have to count the interest you are not receiving from investments due to late payment. For instance, when the State is late paying TRS they are not earning interest on that money. I’m not sure if TRS payments are part of the $6.2 billion backlog, but it is part of the overall cash flow situation that we are trying to fix. Given our pension systems return on investments, this could easily make up the additional $40 million for the bean counters.
3. Loss tax revenue from higher unemployment. Late payments are causing layoffs, furloughs and overall reduction of wages. This affects the Illinois economy and reduces tax revenue at all levels of government. The backlog of unpaid bills is nearly 1% of our Gross State Product that is missing out of our economy. It’s hard to put a numerical figure on how much State revenue is missing because of this economic drag, but I’m sure there is an economic model out there that could figure it out.
- Ahoy - Friday, Nov 4, 11 @ 3:09 pm:
Also,
No one is paying the bills through the budget process. It is simply not being budgeted for. Additionally, does anyone really think the legislature has the disciple to budget on their own the payback of these bills? If so, I would like to introduce you to reality.
To Raising Kane’s point about “using revenue growth to pay down the debt over time,” our State will start seeing revenue decline in FY 2016 as the tax increase is reduced January 1, 2016. The state needs to account for this and cannot use added growth that is not there.
- Raising Kane - Friday, Nov 4, 11 @ 3:33 pm:
Ahoy, your points all make my point. “No one is paying the bills through the budget process.” Of course they arent but if you clear all the old bills and make the balance sheets look better do you think they will stop spending??
I dont understand point #2. No, we aent earning interest but we wouldn’t be earning interest if we borrowed either…we would be paying it.
And how would borrowing to pay our bills increase employment? Look at states around the country who don’t have our kind of backlog but actually have worse unemployment. Do you really think if you pay a company 300K that they are owed they are going to run to careerbuilder and post a job?
And yes, prompt pay interest cost money. It cost less now because the GA changed it to begin 90 days after a bill is accepted as opposed to the 60 days it used to be. FY10 was 62 million, FY11 was 28 million in prompt pay…expect that number to go down now that the clock starts at 90 days.
And I totally agree with you about the tax increase sunseting in 2016….I just don’t see how that is possible.
- Tom Joad - Friday, Nov 4, 11 @ 3:59 pm:
Instead of hand wringing, the parties should agree that all member project money should redirected to pay off past due bills, starting with those that are accruing interest. These projeects can be eliminated for one year or two years. Next, a dedicated source of revenue should be passed to pay of the remaining debt owed to vendors and service providers. The source could be a cut of the casino bill revenue or some funding from the CME deal that is being hashed out.
- Rich Miller - Friday, Nov 4, 11 @ 4:02 pm:
===that all member project money should redirected to pay off past due bills===
That’s mostly longterm debt. I wouldn’t want that. Medium-term is as far as I’d go for bills.
- Ahoy - Friday, Nov 4, 11 @ 4:37 pm:
RK, we just don’t see eye to eye and I do not agree with your arguments in the last post (and that’s ok). I would address them, but it’s a Friday afternoon and I think I still have a beer in the fridge.
The overall concept is very simple. The State of Illinois is borrowing from businesses, social service providers and other units of government who do not have the cash flow to be the State’s lending institution. There is a solution in front of the legislature, they can restructure this debt and use a lending institution as a bank instead of the 160,000 organizations that are not. Either way, it’s going to take multiple years to pay off.
- walkinfool - Friday, Nov 4, 11 @ 4:51 pm:
For those struggling with back-of-the-envelope calculations/guesses: The Senate and House bills actually offered early this year specifically to pay-off late bills, were fully analyzed, and had a positive fiscal benefit for the state, beyond any social and economic benefits.
I don’t know the updated numbers, since Accounts Payable has decreased in size and lateness overall, but I doubt the benefit has completely disappeared. It certainly is not negative.