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http://www.businessweek.com/magazine/waiting-for-a-check-from-illinois-get-in-line-07012011.html

State Debt

Waiting for a Check from Illinois? Get in Line


In Illinois, you’re never too big or too small to get stiffed by the man. The strapped state government, awash in debt, is now $4 billion behind in paying its bills. At least 8,000 businesses, charities, and state agencies have been waiting patiently—or not—for the state to scrape together enough money to settle up. IBM (IBM) is hoping to see $1.1 million for equipment and services it provided the government. Office Depot (ODP) is out $660,955. And the 17th Street Bar & Grill in downstate Sparta, Ill., is sitting on a $340.52 tab. At least 114 companies are due more than $1 million. To put the mess in perspective, the backlog is larger than Delaware’s entire $3.5 billion budget.

While other states have at times gotten behind in paying their bills—California briefly issued IOUs to cover a shortfall in 2009—Illinois is in a deadbeat class by itself. The list of debts has been growing for three years and amounts to more than 10 percent of the state’s general budget for the coming fiscal year.

IBM and Office Depot can get by just fine while they wait for that elusive check to arrive. Smaller businesses can’t shrug off the holes in their ledgers so easily. Some have been forced to fire workers, cut services, or try to obtain loans to stay afloat. “Banks have refused us a line of credit because of the state,” says David Baker, executive director of the nonprofit Open Door Rehabilitation Center in Sandwich, Ill., which is owed $880,000. “We’ve had a longtime relationship with bankers, but now they wonder, ‘What if the state never pays you?’”

Until recently, Illinois owed the South Suburban Council on Alcoholism and Substance Abuse, in the Chicago suburb of East Hazel Crest, about $1.4 million. The nonprofit has an annual budget of $5 million, and 75 percent of its revenue comes from state funds. To stay in business, Chief Executive Officer Allen Sandusky laid off nearly a third of his 155 employees and had to take out a $1 million line of credit at 6 percent interest. “Somehow the human service system tends to be on the lower end of the priority list,” says Sandusky, who finally got paid.

Kelly Kraft, a spokeswoman for Illinois Governor Pat Quinn, says settling the debts is a “key component” of the state’s plans to climb back into the black. In January, lawmakers approved breathtaking new taxes: a 67 percent increase in the state income tax and a 46 percent hike in the corporate income tax. The estimated $7 billion those taxes raised still weren’t enough to cover the projected $13 billion budget deficit in fiscal 2011. Quinn, a Democrat, proposed selling bonds to make up the difference. Republicans in the legislature argued the state shouldn’t borrow itself out of trouble and blocked the plan. “We’re going to try and work our way out of it,” says state Comptroller Judy Baar Topinka. “Don’t expect this to happen tomorrow, because it won’t.”

Illinois, which borrowed to make its two most recent annual pension payments, is tied with California as the state with the lowest credit rating, in the estimation of Moody’s Investors Service (MCO). States covet an AAA rating from Moody’s. Illinois ekes out a single A. The state’s stack of liabilities contributes to its dismal score.

While the politicians in Springfield dither, new bills are piling on top of the old ones. Illinois hasn’t stopped spending—$5.5 million in accumulated gasoline charges to Wright Express Financial Services (WXS); $1.4 million to Xerox (XRX); $11,300 to La Roma Pizza in downstate Canton.

Delayed payments are also affecting hospitals, universities, and public school districts, along with funeral homes that provide burial services for indigent citizens. Eight of the state’s 10 largest nongovernment creditors are health-care or social-service providers whose bills total $176.2 million, according to the Comptroller’s Office. Bills are paid in the order they are received, which for many businesses means a wait of six months or more. The state has made some hardship exemptions, but a spokesman for the Comptroller notes that whenever someone moves up to the front of the payment line, it means everyone else gets shoved back.

Baker, whose Open Door Rehabilitation Center treats and provides shelter for the developmentally disabled, hopes he can stay open long enough to see his $880,000. “Our only business is with the state,” he says. “You cross your fingers and live another week.”

The bottom line: Even as debt-ridden Illinois struggles to clear a vast backlog of bills, it continues to rack up charges it cannot afford to pay.

Jones is a reporter for Bloomberg News in Chicago.
Silverberg is a Bloomberg Businessweek contributor.

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