SPRINGFIELD — A program that helps vendors get paid even when the state is late paying its bills might be in danger, the head of one financial company said, because of the way Illinois Comptroller Susana Mendoza is prioritizing the bills that she does pay.
The program is called the Vendor Payment Program and it allows third-party financial companies, known as “qualified purchasers,” to buy the debts owed to state vendors and then collect the late interest penalty owed whenever the state does pay the bill.
The problem, said Andrew Greta, president of Illinois Financial Partners, one of the program’s participating companies, is that Mendoza’s office has put a priority on paying off the principal owed on invoices so they stop accruing interest. But she only rarely, and sporadically, makes payments on the interest that is already due.
“They have been few and far between,” Greta said of the interest payments during an interview Friday.
“To date, we've got about close to $50 million in interest payments that remain outstanding,” he said. “So, they have made some payments from time to time. … But … there is no predictability to it and as far as we can tell, she's completely put interest payments on hold now.”
Abdon Pallasch, a spokesperson for Mendoza, disputed that statement. In an email Friday, he said the comptroller’s office paid out $127 million in late payment interest penalties in 2019, and it paid out $16.3 million this year before the COVID-19 pandemic hit, cutting deeply into state revenues.
“We sympathize with Mr. Greta and the other qualified investors who have made healthy profits on this program and would like the final portions of their payments but we are not going to leapfrog them over nursing homes, hospice centers, battered women’s shelters and other state vendors awaiting payment,” Pallasch wrote. “They have received most of their payments and they will eventually be paid in full as fiscal conditions allow.”
Greta, however, said the problem didn’t begin with the COVID-19 pandemic. He said some of the invoices his company holds have had interest payments due for years.
For example, he noted in an email that his company purchased a $57 million invoice that was payable for insurance premiums that were due as part of the State Employee Group Health plan. The state paid that base invoice in February 2018, making the $4 million in late payment interest penalty due at that time. The invoice for that $4 million was accepted by the comptroller’s office in August 2018, but Greta said that, to date, it still has not been paid.
In another case, he said, Illinois Financial Partners purchased a $50,000 invoice in March 2018 that the Department of Corrections owed to a food service vendor. The base invoice was paid in April, leaving an interest penalty balance of approximately $6,000. The comptroller’s office accepted that bill in October 2018, nearly six months after it had become payable. In the nearly two years since then, the company still has not been paid.
As of Friday, the state had a backlog of past-due bills totaling just over $5 billion. Under state law, if those bills are not paid on time, the state is charged a late payment penalty of 1 percent per month, or 12 percent per year.
During an interview with WTTW-TV in Chicago in June, Mendoza was asked how she was keeping up with payments for COVID-19-related expenses while the state was suffering from a massive revenue shortfall. She explained her rationale for delaying late payment interest penalties.
“I don’t pay interest on interest. That’s going to go to the back of the line,” she said. “I need to make sure that I’m either paying front-line providers or I’m paying down bills that are accruing late payment penalties at 12 percent. That’s the best use of taxpayer money.”
But Greta said Mendoza’s reluctance to make those interest payments is having a ripple effect that extends far beyond the financial lenders who take part in the Vendor Payment Program.
Under the program, he said, companies like his act much like commercial banks. They borrow money from their investors at a certain rate, something less than the 12 percent the state pays. They then pay the vendors 90 percent of what they’re owed and wait for the state to eventually pay off the bill with interest.
When that payment comes, the companies then give the vendors the remaining 10 percent on their bill and pay the original investors the interest they are owed. The difference between the interest they pay to investors and what they collect from the state, known as the interest rate “spread,” is where the qualified purchasers make their profit.
And the certainty that the state will eventually make those payments is what enables his company to get money into the pockets of vendors, many of whom cannot afford to wait for the state to catch up on its bills.
But because the state has been reluctant to make those interest payments, Greta said, many of the investors that he works with have stopped putting money into the program, and he has to turn down requests from vendors to purchase their debt.
“We've had an uptick in the number of inquiries that we've been getting, you know, sort of vendors asking for help, and we have to turn them away,” he said.
In addition, he said, there are many more vendors whose debts have already been purchased who are still waiting for the remaining 10 percent balance still owed to them.
Greta and other companies that take part in the program have complained to lawmakers about the late interest payments for years, and during the recent special session in May, lawmakers put language into one of the budget bills that says the comptroller’s office “must issue the interest payment within 60 days after acceptance of the interest voucher.”
Greta argues that Mendoza’s office is intentionally ignoring that language, but Mendoza’s spokesperson Pallasch disagreed.
“The (Illinois Office of the Comptroller) maintains compliance with this section of law, which is specific to a narrow group of interest vouchers that are permitted under the State Finance Act for those principal vouchers paid after the close of a fiscal year,” he wrote. “Without it, those vouchers would not be allowed to be submitted to the IOC for payment since the fiscal year has officially closed.”
Capitol News Illinois is a nonprofit, nonpartisan news service covering state government and distributed to more than 400 newspapers statewide. It is funded primarily by the Illinois Press Foundation and the Robert R. McCormick Foundation.