Experts question borrowing money for Illinois bills
</element><element id="paragraph-1" type="body"><![CDATA[Illinois financial experts question the wisdom of Gov. Pat Quinn's proposal to borrow billions of dollars to pay a stack of overdue bills, unless it's part of a broader plan to fix the state's financial problems.
That doesn't mean that adopting the measure to pay the state's debts isn't the fair thing for state government to do, some analysts said. The move might even cut some costs.
"There's a business answer and there's a moral answer," said Brian Battle, a director at the Chicago-based investment firm Performance Trust Capital Partners. "The moral answer is yeah. It's morally repugnant for hospitals and nursing homes to provide services and then for the state not to pay."
"The business answer is a little trickier."
It's tricky because it would cost hundreds of millions of dollars in interest each year and could hurt the state's credit rating. It might also reduce the pressure for a long-term overhaul of the state budget.
Financial experts criticized the move - if it's done in isolation. But it would make some sense as part of a broader plan to cut spending and fix the problems that created the biggest deficit in Illinois history.
"It's not so much about how much you borrow. It's about whether you have a credible plan," said David Merriman, a state budget specialist at the University of Illinois' Institute of Government and Public Affairs.
The $8.7 billion proposal is key to the state's budget and what Illinois will do next to escape from a massive deficit.
If approved, it would sweep away most of the annual deficit by turning it into long-term debt that Illinois can pay bit by bit. If it is rejected, then the state might have to make much deeper spending cuts just to pay a portion of the overdue bills.
The Quinn administration says Illinois owes about $6 billion for goods and services - $51,281 to a Lincoln hospital, for instance, and $416,212 to a Rockford epilepsy group. Add in what Illinois owes for employee health insurance and tax refunds to businesses, and the total backlog tops $8.7 billion.
Quinn argues state government must live up to those obligations.
"Currently, Illinois pays its bills . . . six to eight months behind schedule," the Chicago Democrat said in last week's budget address. "We force our universities, our service agencies, our companies doing business with the state to bear the burden of slow pay."
He also made the case that it would save money.
Right now, Quinn said, businesses either refuse to bid on state contracts or charge more money because they know they'll wait months to be paid. He said this costs between $700 million and $1 billion.
And it wouldn't hurt the economy for state government to deliver billions of dollars to businesses and groups across Illinois, Quinn added.
Merriman agreed that Illinois might cut procurement costs by paying its bills and attracting more bidders. He snickered at the idea of payment boosting the economy.
"It strikes me as a very weak argument," Merriman said.
Taking on new debt would require support from the Legislature's Republican minority, but Republicans oppose the idea. They say it's the kind of bad budget policy that created Illinois' crisis in the first place.
One group with a close eye on state finances argues Republicans are right to oppose the plan and push for bigger changes. The deficit can't be conquered unless the state cuts spending and overhauls its pension and health care programs, says the Commercial Club of Chicago.
"There's just no way any more borrowing can help the situation," said W. James Farrell, the club's chairman.
The details of Quinn's proposal surprised some financial experts.
They thought it would be more logical to pay off the new debt over five years instead of 14 because it would be cheaper in interest payments in the long run, as Quinn wants to do. They also questioned whether insurance costs and business refunds qualify as the kind of obligation the state should borrow to pay.
They generally played down the risk of bond-rating agencies lowering Illinois' grade, costing the state more money in interest - not because the plan is a good idea but because Illinois is already seen as such a financial mess.
"Were this not Illinois it would be looked at much more critically by the market," said Matt Fabian, managing director at Municipal Market Advisors, "but the state been borrowing and not making structural improvements for years."
Fabian said the cost of debt eats up 5 percent or 6 percent of a typical state's annual revenue, and anything above 10 percent is a "bright red flag." In Illinois, the figure is about 11 percent.
The experts said there was little risk that Illinois wouldn't be able to borrow the money, although it would have to pay high interest. The Quinn administration has mentioned roughly $600 million a year.
But all agree it was worth doing only as part of a permanent solution to the state's budget problems, one that might include spending cuts, changes to pensions and health programs and an overhaul of the state tax system.
Merriman even says the borrowing plan could be set up to require broad action on the budget. If Illinois failed to meet certain benchmarks, it would have to repay the entire debt immediately - a huge incentive to begin looking at the big picture.
"The discussion (now) is all about piecemeal approaches rather than a general, global solution," Merriman said. "That's how we got into this mess."