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New Illinois laws no panacea for state's unpaid bill backlog: Moody's

CHICAGO (Reuters) - New laws enacted by Illinois in response to a huge backlog of unpaid bills fail to address the underlying problems that led to the state’s reliance on payment deferrals, Moody’s Investors Service said on Tuesday.

Illinois has the lowest credit ratings of any U.S. state, and its pile of unpaid bills is currently estimated at $8.1 billion. Moody’s said that three measures signed into law by Governor Bruce Rauner last month are aimed at making management of the bill pile less costly and more transparent.

However, the credit rating agency said the underlying problem of the state’s chronic budget deficits and ability to push bill payments into future years remains.

“To fully eliminate the backlog without resorting to non-recurring tactics such as further bonding, the state would have to do something that the new laws do not require: achieve budget surpluses over the course of several years,” Moody’s said in a report.

Illinois sold $6 billion of general obligation bonds last year to shrink the backlog, which ballooned to more than $16 billion in the wake of a political impasse that left the state without complete budgets for two-straight fiscal years. State officials have estimated the deficit in the fiscal 2019 budget at $1.2 billion.

The state accrued from fiscal 2016 through fiscal 2018 $1.14 billion in late bill payment penalties that could reach as much as 12 percent annually, according to Moody’s, which rates Illinois at Baa3, a notch above junk. One of the new laws requires state agencies to budget for late-payment interest.

Another law authorizes the Illinois treasurer to use up to $2 billion in available state funds to help pay down the backlog at a lower interest rate.

Treasurer Michael Frerichs said on Tuesday he expects to begin implementing the law by year end, pending the completion of an intergovernmental agreement with the state comptroller, who is responsible for paying Illinois’ bills.

“We are very close to doing something,” Frerichs said in an interview.

Moody’s noted the law will not eliminate the backlog.

“In fact, by making the backlog appear smaller, it might well dampen the current urgency to address the state’s fiscal

challenges,” Moody’s added.

A third law, which Moody’s said is expected to have no credit impact, requires enhanced disclosures of Illinois’ vendor payment program. Private lenders qualified by the state purchase unpaid receivables from vendors and pocket late-payment penalty fees once the bills are paid.

Reporting by Karen Pierog in Chicago; Editing by Matthew Lewis