Illinois lawmakers eye $2.5 bln bond deal to pay bills

April 10 Wed Apr 10, 2013 7:52pm EDT

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April 10 (Reuters) - Illinois would add $2.5 billion to its credit card balance to pay old bills--including $2 billion owed to Medicaid providers--under a bill pending before the House of Representatives.

The bill, which has the support of powerful Democratic House Speaker Michael Madigan, underscores the unorthodox measures Illinois lawmakers are considering in the face of $9 billion in unpaid bills and a pension underfunding approaching $100 billion.

A House committee on Wednesday passed the measure, which authorizes the sale of $2.5 billion of general obligation bonds. Because it has Madigan's backing, the measure could come to a vote before the legislature concludes its spring session on May 31.

Previous efforts to sell state bonds to pay vendors-- including doctors, hospitals and social service agencies--have failed to gain traction. But the November election gave Democrats a super-majority in both the House and Senate, meaning the measure theoretically could win the super-majority of votes required for bond issuance without any Republican support.

Supporters of the bill said the five-year bonds would cost Illinois about $40 million in interest. The alternative is to pay $60 million over the same period in the form of late-payment penalties to health-care providers and other vendors, supporters said.

Up to $2 billion of the bond proceeds would go to Medicaid providers, allowing the state to capture federal matching funds that could help meet bond payments, supporters said.

House Majority Leader Barbara Flynn Currie, the Democratic representative who introduced the measure, said it would help speed money to human services providers and other companies that have seen Illinois fall behind by as much a year on paying its bills.

"We owe these providers real money," she said during the committee meeting. "And we can do this in a way that saves the state money."

But Republicans on the committee raised concern that increasing Illinois' approximately $30 billion of outstanding general obligation debt--without passing pension reform or cutting spending--would hurt the state's already shaky credit ratings.

"My concern is that if we try to issue $2.5 billion of bonds, we will be downgraded again without pension reform," State Representative David McSweeney, a Republican, said during the hearing.

The proposal seems likely to add to Illinois' reputation as a prolific yet sometimes troubled bond issuer. The state successfully sold $800 billion in general obligation bonds in early April. But that came only after Illinois in January delayed a $500 billion issue just days after the Standard & Poor's rating agency downgraded the Illinois debt rating.

Craig Brothers, a portfolio manager at Bel Air Investment Advisors in Los Angeles, said the proposed bond issue would not address concerns that bond investors have about Illinois' fiscal problems.

"Unless they are doing things to sort of mitigate this growing debt to vendors from recurring, I don't think this debt would be well received," Brothers said.

Major Wall Street credit rating agencies, Moody's Investors Service and Standard & Poor's Ratings Services, have pounded Illinois' bond ratings to the lowest levels among states, and the Pew Center on the States has found Illinois' state pension systems to be the most under-funded in the nation.

Illinois' $9 billion in unpaid bills sets it apart as a state that uses delayed bill payment as a budget-balancing tool.

David Merriman, associate director of the Illinois of Government & Public Affairs at the University of Illinois, said the plan could make sense because it changes the relationship between the state and its creditors. Vendors become unwilling creditors when Illinois falls behind on its bills, while bondholders, on the other hand, would be willing to lend money to the state.

"You've taken a reluctant creditor and you're exchanging that for a willing creditor. In general, it's a responsible way to act," Merriman said.

A spokesman for Illinois Governor Pat Quinn, a Democrat, had no comment on the measure.

Illinois Comptroller Judy Baar Topinka, a Republican who oversees the payment of state bills, opposes the borrowing plan.

"She believes borrowing provides a false sense of security and takes pressure off the state to address spending, costing taxpayers even more in the long run," said her spokesman Brad Hahn.

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