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States stiffing vendors

30 Oct 2010 by Jim Fickett.

Based on a quick look at four states with well-known budget problems, it would appear that Illinois may be the only state were delayed payments are a sizable fraction of the state budget. And even there, delayed payments are a small fraction of unfunded retirement obligations. All this reinforces the conclusion that the biggest problem, by far, facing state budgets is unfunded retirement obligations. Vote accordingly on Tuesday.

It is fashionable these days to apply the term “dysfunctional” to state governments. That of Illinois probably ranks first in deserving the label.

Bloomberg recites the litany:

Illinois government “has long been characterized by an unwillingness to enact the politically difficult fiscal measures needed to balance its budget and fund its pension plans,” said Moody’s Investors Service in September.

The Illinois State Board of Investments, which manages about one-fifth of pension funds, can’t wait, William R. Atwood, its executive director, said in an interview. The board is selling $80 million of assets a month to pay benefits, he said. …

Neither candidate’s campaign responded to a request from Bloomberg News to detail his ideas to resolve the $13 billion deficit, the state’s biggest ever and equivalent to about half its budget …

Beyond the budget gap lies the pension gorge. Illinois has the worst-funded state system, with just over half the assets needed to pay claims, according to data compiled by Bloomberg. … State lawmakers made no appropriations to pay for pensions and didn’t approve [Governor] Quinn’s plan to sell $3.7 billion of bonds to fund contributions this year. With no new cash, the funds must sell assets to pay benefits, Atwood said. …

The state borrowed for its 2010 contribution. …

Blagojevich, convicted for lying to federal agents, is the fourth of the past nine governors to face charges.

So in the long list of problems in Illinois and, of course, in many other states, which ones really matter? In a sense they all do, because they reflect a systemic, deep-seated unwillingness to stop delaying the pain and face up to the shortfall. Still, some matter more than others. It is probably the case that nothing comes close to the unfunded retirement obligations. If one wants to understand the big picture for the future of state budgets, this is where to start. And, I might add, in educating yourself for elections this coming week, probably nothing matters more, at least at the state level.

This post is the second looking at some of the smaller problems, to get a more quantitative handle on how much they matter. The first was on borrowing from the federal government to pay unemployment benefits.

Today I want to look at delaying payments as a form of longer-term borrowing.

Back to Illinois: Stateline reports:

In the past, [a youth center in Humbolt Park] has had to wait a month or two to get [its regular funding from the state]. This year, the center went six months without receiving a single check from the state. To get by, the center exhausted its line of credit, cut back on services and laid off seven of its 32 staff members. Only half as many children were able to take advantage of the Youth Service Project’s programs as did two years ago. …

What the Youth Service Project experienced with its funding wasn’t an isolated bureaucratic snafu. Rather, it’s just the way Illinois government operates these days. …

The impact of that backlog is being felt all across Illinois. Service providers, vendors, universities and others who do business with the state are struggling to stay open, let alone plan for the future, in an environment where they never know when their next check will arrive from Springfield. Many have resorted to layoffs or letting their own bills go unpaid, trickling the economic impact down to businesses that have no direct connection to the state. …

For this series, Stateline focused most of its reporting on Illinois because it leans on the practice of delaying payments more than any other state. But recently, California and New York also have experienced cash flow difficulties that resulted in delayed payments to citizens, vendors and local governments.

How big a problem might this be? According to a Fitch bond downgrade notice in June 2010,

The state's accounts payable backlog is projected to increase by more than $2 billion to $6.4 billion by the end of FY 2010, equal to 23% of general fund resources. The state continues to manage its budgetary deficit by deferring payments to vendors and others. …

the pension systems' large unfunded liabilities. As of June 30, 2009, the unfunded accrued actuarial liability was reported at $62.4 billion

So the accounts payable backlog is a major problem on the scale of one year's budget – 23% of general fund resources – but a small-to-medium overall debt problem – 10% as big as the (underestimated) unfunded pension liability.

I don't believe there is any aggregate data on this problem for states in general, so there follow some partial results for a few other states. These states were chosen because they are famous for major budget problems, and so might be expected to use any and all tricks available.

California: The issuance of IOUs to vendors in 2009 made many headlines. Starting in July of 2009, according to Bloomberg,

About $2.6 billion in promissory notes were issued, according to [Controller John] Chiang’s office.

These were only issued for a few months, and the state has avoided issuing IOUs in 2010. However that was enabled in part by delaying payments elsewhere:

California’s cash strains this year have been eased by a law signed by Schwarzenegger allowing the state to defer about $4.7 billion of payments to schools and local governments, Chiang said.

Both of these numbers, $2.6 billion and $4.7 billion, are quite small compared to California general fund, with expenditures of $86 billion in 2009-10. And they are very small compared to unfunded retirement obligations which, realistically figured, are in the hundreds of billions.

New Jersey: According to the state Office of Management and Budget, the state ended fiscal 2009 with net accounts payable to external parties at $172 million. Out of total general fund revenues of $29 billion, this is a very small fraction. And it is even smaller compared to the (underestimated) unfunded pension liability of $46 billion.

New York: New York's Annual Information Statement on the budget gives no information on payments to vendors or the balance of accounts payable. A few google searches turn up relatively little. According to BuffaloNews.com, the state delayed $750 million to local governments and non-profits in December 2009, and another $2.1 billion in August 2010. These amounts are very small compared to the 2009-10 state operating budget of $79 billion.

Conclusion: it would take a long time research all states carefully. But based on a quick look at four states with well-known budget problems, it would appear that Illinois may be the only state were delayed payments are a sizable fraction of the state budget. And even there, delayed payments are a small fraction of unfunded retirement obligations.