Vendors Unpaid as Pitfalls Impede Illinois’s Path to Stability

Ron Ford knows that Illinois, the state with the worst credit rating in the U.S., will have returned to financial health when he and about 19,000 other vendors get paid the combined $8.8 billion owed them. That day won’t come soon.

Legislators this month approved a $160 billion pension restructuring bill that has investors looking less critically at the nation’s fifth-most-populous state. Still, Illinois’s path to financial recovery resembles the board game “Chutes and Ladders,” strewn with pitfalls that could undo progress.

Public-employee unions have promised a constitutional challenge to the retirement-fund changes, raising some of the same issues that led to an Arizona court’s striking down a pension restructuring last year. A $5 billion temporary income-tax increase representing 15 percent of Illinois’s annual operating budget is to expire in 12 months, and no consensus has emerged on extending the levy or replacing the revenue.

“I see the rollercoaster ride continuing,” said Ford, chief executive officer of Chicago-based Help at Home Inc., a health-care company that the state owes $66 million, up from $43 million in June 2011.

“And it’s an election year. I don’t see anyone taking a hard stand,” said Ford, whose company is among unpaid nongovernment vendors owed more than $1,000. That listing from the Illinois comptroller’s office runs 4,139 pages.

‘Modestly Improving’

While the fiscal condition of U.S. states is “modestly improving,” according to a Dec. 10 report from the National Association of State Budget Officers, Illinois is a laggard. Its comeback is hampered by issues that might not be settled for two years.

Unlike California, whose recovery is fueled by existing pension reforms and a 2012 voter-approved tax increase, the Illinois comeback hinges largely on the state’s highest court agreeing that pension cost-of-living reductions and other changes approved Dec. 3 do not violate constitutional protections of retirees. The document states that the benefits are the result of a contract and “shall not be diminished or impaired.”

“What they’re counting on is that the Illinois Supreme Court will ignore the Illinois Constitution and make a political ruling in this case,” said Ralph Martire, executive director of the Center for Tax and Budget Accountability, a Chicago-based nonprofit that tracks government finance.

Legal Questions

Democratic House Speaker Michael Madigan, who helped broker the pension deal, has said he is confident the bill will pass constitutional muster.

The pension fix won Wall Street approval last week when the state sold $350 million of taxable general-obligation bonds at almost a third less the cost of a similar sale in April, data compiled by Bloomberg show.

“The market realizes this is a long road and there are other considerations,” said Chris Mier, chief muni strategist at Loop Capital Markets in Chicago. “The issue of the temporary tax increase hasn’t been resolved. There are still vendors that need to be paid.”

Three years ago, lawmakers in Springfield, the capital, approved a 67 percent increase in the personal-income tax and a 46 percent boost in the levy on corporations. At that time, the backlog of unpaid bills was about $6 billion.

Expiring Increase

It’s now $8.8 billion, according to the comptroller’s office. While Democratic Governor Pat Quinn’s administration projects the amount will fall to $6.8 billion next year, the ability to pay will depend on tax increases scheduled to expire next December.

With their fate unclear, lawmakers are being pressed by corporations to provide breaks as an inducement to remain in or move to Illinois. Archer-Daniels-Midland Co., the world’s largest corn processor, is planning to move its headquarters from Decatur, Illinois, and is seeking $1.2 million in annual tax credits for 20 years.

“We must resist the temptation to cave to corporate officials’ demands every time they impose a deadline for payment in exchange for remaining in Illinois,” Madigan said in a Dec. 11 statement, referring to tax breaks that would cost the state $67 million.

“I find it very difficult to support tax giveaways for corporate CEOs and millionaire shareholders,” Madigan said.

Retirement Age

The pension bill, which would limit annual cost-of-living allowances and raise the retirement age for some workers, was signed by Quinn on Dec. 5. It isn’t scheduled to go into effect until June.

“Illinois is moving forward,” Quinn said, hailing the plan that projects $160 billion of savings during the next 30 years -- if it survives the promised legal challenge from a coalition of unions representing public employees and retirees.

After years of focus on the legislature’s struggle to pass a pension restructuring, attention will shift steps away from the Capitol to the Illinois Supreme Court, said John Colombo, a University of Illinois Law School professor.

“This is all in the hands of seven people in Springfield,” Colombo said, referring to the justices.

He said a ruling will either solidify the state’s financial recovery, or undo the pension fix -- in 18 months to two years.

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