In early 2002, former Illinois Comptroller Dan Hynes warned about the deteriorating condition of state finances. In March, Hynes warned that the bill backlog had hit $1.2 billion, which he said was the largest in the state’s history. Eleven years later, state officials would be overjoyed to have a bill backlog of only $1 billion to juggle.
In early 2002, former Illinois Comptroller Dan Hynes warned about the deteriorating condition of state finances.
A recession was cutting into state revenues. The state would end the 2002 fiscal year with less revenue than the year before, the first time that had happened since 1955.
The drop in revenue was putting the squeeze on the state’s ability to pay its bills on time. In March, Hynes warned that the bill backlog had hit $1.2 billion, which he said was the largest in the state’s history.
“Anyone who does business with the state has had to wait a month to be paid,” Hynes said at the time.
Eleven years later, state officials would be overjoyed to have a bill backlog of only $1 billion to juggle.
“If it only were $1 billion at this point, we could deal with that,” said Brad Hahn, spokesman for Comptroller Judy Baar Topinka, whose job it is to pay the state’s bills. “The situation has gotten dramatically worse and $1 billion seems like a great goal at this point.”
The good news for Illinois is that since lawmakers raised the state income tax by 67 percent in 2011, the backlog has stabilized and is not getting worse. Last Monday, Topinka’s office put the total backlog -- including bills in their office and bills being held in state agencies -- at $5.6 billion.
The amount reflects the cyclical nature of the bill backlog. During months when the state has strong revenue collections — like April when people are filing their income tax returns — the office is able to pay more bills. In late March, the total backlog was pegged at about $9 billion.
“It has allowed us to tread water,” Hahn said. “Essentially we have stayed in the same place for the last two years.”
The bad news is that the backlog remains stubbornly high, although the Center for Tax and Budget Accountability says the backlog would have hit $16 billion without the tax hike.
“We’ve seen revenue increase with that tax increase, but at the same time, the state’s expenses have increased as well,” Hahn said. “As a result, we’ve held the status quo. Things haven’t gotten a whole lot worse, but they haven’t gotten a whole lot better.”
Nor are they likely to in the near future.
“Pension reform is the only way that we can see that the state can stabilize its financial situation,” said Laurence Msall, president of the Chicago-based Civic Federation. “Even after that, the state is going to have many years of difficult budgets and unless it shows great discipline, it is not going to bring down unpaid bills significantly.”
Ralph Martire, executive director of the Center for Tax and Budget Accountability, supports a different approach to pension reform than Msall. However, they both agree that pension reform is a crucial first step to resolving the state’s budget problems, even if those problems won’t disappear overnight.
“It would still take years and you couldn’t allow the temporary tax increase to go away. Obviously, that bankrupts us,” Martire said. “It would could take four to five years.”
How it started
The seeds for the current backlog were sown over a decade ago when the state was facing yet another budget squeeze.
“The severity of Illinois’ financial crisis is due to minimal attempts to restore fiscal stability in the years following the 2001 recession,” Topinka’s office concluded in a September 2011 analysis of how the state got into its financial mess.
The report determined that the last time the state had a balanced budget using one generally accepted view of what constitutes a balanced budget was 2001. That was the last time the state had enough money on hand at the end of the year to cover bills run up during that year, but which wouldn’t be submitted to the state for payment for another two months. In state jargon, this is called lapse period spending.
Think of it in terms of a household budget set up to run in conjunction with a calendar year. In December, the last month of the fiscal year, the household is using electricity, water and natural gas. However, the bill for those utilities won’t be sent until January, the start of a new fiscal year for the household. If the household has been prudent, it will have money available from December to pay the bills when they arrive. If it doesn’t, problems can follow.
Since 2001, the state hasn’t ended a budget year with enough money on hand to pay all of the bills coming due.
“It is fair to say the lack of balanced budgets and the (2008) recession has caused the bill backlog,” Msall said. “One of the things the state has not done, when expanding programs, was a vigorous approach to matching up revenues with that.”
Martire agrees the state was spending more than it could really afford during the decade, although he has long said the state’s tax structure should be changed to bring in more revenue. The alternative was to cut education, health care, social services and public safety which consume 90 percent of state tax dollars.
“If your means don’t support life, you don’t pick which kid starves to death,” Martire said. “These long-term problems are really all traceable back to bad tax policy and the monumental efforts politicians took to avoid dealing with bad tax policy so they wouldn’t have to have a vote on increasing taxes,” he said.
Martire’s organization is preparing its own analysis of the growing problem. Part of it, he said, was a state law that allowed some health-care bills, particularly for Medicaid and group health insurance, to be pushed from one fiscal year to the next.
“This practice grew to the point where by the second or third year of the (ex-Gov. Rod) Blagojevich administration they were kicking around $2.5 billion in Medicaid bills from one year to the next and greatly extending the payment cycle for human service providers,” Martire said. “That’s when it really started increasing.”
By the middle of the decade, the state was starting to deal with the rapidly increasing cost of state pensions built into a 1995 law intended to bring the state pensions to 90 percent funding by 2045.
“It started really growing at unsustainable, unaffordable increments on a year-to-year basis,” Martire said. “Nothing changed on the revenue side, and they had all these past due bills accumulating.”
By the end of the decade, the worldwide recession hit, which resulted in the state losing tax revenue, giving it even less money to cover expenses that were increasing as people needed help from state programs to cope with the recession.
Through much of the Blagojevich era, the state also was engaging in what Topinka’s report referred to as “budgetary gimmicks.”
“Illinois has used a variety of maneuvers over the years to present the appearance of a balanced budget, even as the tactics undermine the long-term fiscal health of the state,” the report said.
It included the practice mentioned by Martire of deferring payment of Medicaid and group health insurance bills from one fiscal year to another.
“Those payment delays may allow for a temporary ‘balanced budget,’ but the liabilities remain and are then compounded in subsequent years,” the report said.
However, state officials also relied on things like a tax amnesty program and taking money from
dedicated funds to prop up spending. The problem was the money was one-time revenue on the state’s books, but it wasn’t used to pay for one-time expenses. The next year, the expenses still were there, but the revenue wasn’t.
The last couple of years, lawmakers have changed their approach to crafting budgets. They start with expected income and build a budget around it. It has resulted in cuts to core state programs like education and Medicaid.
“The process in the last two years to three years has gotten significantly better,” Msall said, while noting the legislature still resorted to gimmicks. For example, lawmakers did not put nearly enough money in the current budget to cover group health insurance costs that were expected through the year.
Gov. Pat Quinn’s administration said the budget plan the governor submitted in March is realistic.
“The major part of the goal of his budget is to end the gimmicks that have been used through too many administrations,” said budget office spokesman Abdon Pallasch.
Whether Quinn, Msall or Martire, all agree that the state must do something about its pension costs if it hopes to eventually reduce the bill backlog. Right now, if state revenues increase, all of the increase and more is needed to meet pension costs.
Quinn and Msall support plans that reduce pension benefits. Martire supports a plan to restructure the pension debt, which he said will allow the state to bring its payments under control without reducing benefits, which he believes is unconstitutional.
The administration said its budget plan, if enacted, would cut the backlog to about $6.7 billion by June, 30, 2014. That depends in part on lawmakers agreeing to end a number of business tax breaks and using the $400 million in revenue to pay down bills. Even with that, tough times remain.
“We’ve always been pretty realistic that pension reform is not an option, it has to be done,” Pallasch said. “Even after we do it, we’re still not on easy street for a while. Austere budgets for the foreseeable future, we would agree with that.”
Doug Finke can be reached at (217) 788-1527.
How much is owed a tricky business
Determining Illinois’ bill backlog at any point in time can be a tricky exercise.
One standard is to determine how many bills are sitting in the state comptroller’s office waiting to be paid. On April 29 it was about $3.56 billion on hand in Topinka’s office.
But that doesn’t include bills that are being held in state agencies and that haven’t been sent to the comptroller’s office to have a check issued. Those bills, which the state will have to pay at some point, can add $2 billion to $3 billion to the total. On April 29, Topinka’s office estimated just over $2 billion of bills were being held in agencies.
Moreover, the backlog will fluctuate throughout a fiscal year. State tax collections fluctuate throughout the year. A prime example is March and April when people are filing their income tax returns. Those tend to be good months for tax collections and the state is able to make a dent in the bill backlog.
Conversely, February usually is a bad month for tax collections because it is a short month and comes after the influx of tax collections from holiday shopping.
Comptroller Judy Baar Topinka’s office has established priorities for paying bills. Some expenses are met immediately, like bond payments, state payroll, general state aid to school districts and payments to foster parents.
In other cases, the bills are paid on a first-come, first-paid basis — the oldest bills get paid first.
Topinka spokesman Brad Hahn said the office has and will continue to work with vendors who are facing hardships because of slow bill payments. Businesses or organizations facing problems are urged to contact the office to determine what can be worked out, he said.
Topinka’s office can be contacted at 782-6000.