How Did Illinois Deficit Spend When There Was No Budget?

I’ve been scratching my head over a few things about Illinois’ finances lately. Mainly, I’m perplexed as to how Illinois managed to rack up bills for things it did not have the legal authority to spend money on. Recall that Illinois went without a formal budget for two years (fiscal years 2016 and 2017). It was not, however, a total shutdown: As I wrote about in Chicago Magazine last May, many of aspects of the state government kept humming along even without a formal budget because of court orders, consent decrees, continuing appropriations and a partial budget lawmakers passed to fund K-12 education. I estimated that the state’s General Fund spending was $32.8 billion in FY2016*, which was only about 7% less than the last “normal” year, FY2015. In other words, during the two-year impasse, most of the state’s spending was still legally authorized for a variety of reasons.

Even though most state spending was legally authorized in FY2016 and FY2017, the state didn’t actually have enough revenue to pay all its bills, so a backlog built up—leaving a growing number of vendors with state contracts in the lurch. Imagine trying to keep your business afloat while waiting years to receive payment for services already rendered. Instead of just holding onto the bills, some of these vendors turned to third-parties to offload this debt. Vendors are able to do this because of the Vendor Payment Program (VPP), which then Governor Pat Quinn created in 2011.** Under the VPP, a vendor sells its debt to another entity (known as a “Qualified Purchaser”), and this provides the vendor the cash it needs to keep operating. The state incurs a penalty charge when it pays bills late, and the interest rate is 9% or 12% depending on the underlying service. The Qualified Purchaser gets the interest penalty fees when the underlying bill is eventually paid by the state.

Importantly though, the VPP is only for bills that are for legally authorized spending, and the program was suspended in 2015 during the budget impasse. In 2016, Governor Bruce Rauner created the Vendor Support Initiative (VSI), which is just like the VPP except it’s for bills for which “no appropriation or other legal authority currently exists to pay the invoice.” This brings me to my first head scratcher: how was the Governor able to unilaterally create this program? Moreover, how were bills allowed to stack up if there was no legal authority to spend money on those goods and services? Remember, during the impasse most state spending was legally authorized, and several court cases occurred specifically to hash out whether spending on specific aspects of the state government (for items like state employee payroll) could continue.

So how much unauthorized spending is taking place? It’s a bit unclear. In February, the Governor’s budget chief told lawmakers the state incurred $1.1 billion worth of bills in FY2017 for which there was no legal authority for that spending (this was also detailed in a presentation to possible investors of Illinois bonds). That same month, Bloomberg reported that state agencies had an estimated $2.3 billion in liabilities tied to unauthorized spending.***

Whatever the amount is, state lawmakers will ultimately need to pass appropriations to pay the outstanding bills. In the meantime, vendors can either hold onto the bills or, in theory, sell them to Qualified Purchasers. But, that entire system is being threatened because Qualified Purchasers themselves aren’t getting paid. Karen Pierog reported for Reuters in April that Qualified Purchasers contemplated suing the state because of nonpayment. This brings me to my final set of questions: Which vendors have sold off their bills, and how many bills have Qualified Purchasers bought? This should be relatively straightforward to figure out because Qualified Purchasers are required to submit monthly reports detailing this information. Nearly a year ago I submitted a Freedom of Information Act request to the Department of Central Management Services (CMS) asking for those reports from April 2011 through May 2017 for all Qualified Purchasers (QP). What I got back seemed like incomplete records and didn’t align with previous reporting done by Dave McKinney. For example, the records I received for Payplant (a QP) showed it hadn’t bought any bills, while McKinney reported that Payplant purchased $475,330 worth of bills between November 2015 and August 2016. I also didn’t receive any reports for Illinois Financing Partners (another QP), which Pierog reports has purchased $1 billion worth of receivables since 2015. I sent several follow-up emails to CMS and even asked the Public Access Counselor (which is part of the Attorney General’s office) to review CMS’s response, but never heard back from either entity.

So, to sum it all up, billions of dollars worth of unauthorized spending occurred during the budget impasse, but we don’t really know what the total amount is or how much of that debt was sold to third-parties. And again, this was unauthorized spending. Perhaps the first thing to figure out is how it’s possible for the state to rack up bills for spending that technically has no legal authority.

 

 

Notes
*In my estimate of 2016 spending I included the estimated liability for the State Employees’ Group Health Insurance Program (“Group Health”). There was, however, no General Fund appropriation or other authorization for the 2016 Group Health liabilities.

**Not all vendors/providers are eligible to participate in the VPP or VSI.

***This sentence was changed after publication. The previous sentence (“Illinois Comptroller Susana Mendoza stated that there was an estimated $2.3 billion of unauthorized spending in FY2018”) has been changed because it’s not clear whether the quoted Bloomberg article is referring to FY2018 spending. The Bloomberg article reports the Comptroller as stating that at the start of February there was “$2.3 billion of deficit spending in the form of unappropriated liabilities held at state agencies as of Dec. 31 [2018]”, but that doesn’t specify the actual timing of services or goods delivered. Adding to the confusion is information in the Comptroller’s Debt Transparency Report Summary” for the period ending March 31, 2018, which estimates the shortfall for FY2018 as of that date as $2.5 billion. Specifically the “Debt Transparency Report Summary” states that “agencies estimated potential shortfalls of $1.076 billion in General Funds appropriations for fiscal year 2018.” In addition to that amount, there is also an estimated $1.44 billion shortfall for Group Health, but it’s unclear whether that shortfall is just for FY2018 liabilities.

Special thanks to Daniel Hertz for editing an earlier version.

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