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Illinois budget impasse cost state $1 billion in late payment penalties

CHICAGO (Reuters) - Illinois incurred $1.03 billion in late bill payment penalties last year largely as a result of the state’s unprecedented two-year budget impasse, the state comptroller reported on Monday.

The first monthly debt transparency report by Democratic Comptroller Susana Mendoza found Illinois ended 2017 with $9.246 billion in unpaid bills from vendors, service providers and others. This also included invoices held by state agencies and bills totaling $2.3 billion that still lack legislative appropriation.

The fuller picture of Illinois’ chronic inability to pay its bills promptly was made possible by a new law that took effect on Jan. 1. The law requires monthly instead of annual reports from state agencies to the comptroller, whose office pays Illinois’ bills.

“Now we can all see a clearer picture of what Illinois owes to small businesses, universities, community colleges, social service providers and others,” Mendoza said in a statement. “The Debt Transparency Report takes the politics out of the numbers to provide meaningful data.”

An impasse between Illinois’ Republican Governor Bruce Rauner and Democrats who control the legislature left the state without complete budgets for two straight years. That situation ended in July when lawmakers enacted a fiscal 2018 spending plan and income tax rate increase that overruled Rauner’s vetoes.

The budget’s enactment stopped Illinois’ credit ratings, which are the lowest among the 50 states, from slipping into junk.

Despite the budget stalemate, Illinois continued to operate on spending mandated by state law or by court orders, ballooning the unpaid bill backlog to a record high $16.675 billion.

With the state accruing late bill payment penalties of as much as 12 percent annually, Illinois sold $6 billion of general obligation bonds in October to help pay down the backlog.

The spread for Illinois’ 10-year bonds over the municipal market’s benchmark triple-A yield scale widened to as much as 335 basis points last June. The spread, which subsequently narrowed to 177 basis points at year end, stood at 185 basis points on Friday.

The bond proceeds, along with $2.2 billion in federal matching funds, helped deflate the backlog to $8.835 billion, according to the comptroller’s office.

Mendoza called on Rauner, who is scheduled to unveil his fiscal 2019 budget next month, “to present taxpayers with a detailed proposal for paying off the operating debt and interest penalties his administration ran up.”

The comptroller said the state needs to deal with $2.3 billion of incurred liabilities that cannot be paid without enacted appropriations.

Under a program launched by Rauner in 2015, outside private lenders were allowed to purchase certain overdue state bills from vendors and service providers in exchange for the late payment penalties owed by the state.

Reporting by Karen Pierog; Editing by Daniel Bases and Matthew Lewis