Comptroller calls for ending penalties on late payments

Illinois Comptroller Susana Mendoza is calling for repealing a law that imposes a 12 percent interest whenever the state is late paying its bills, along with a program that allows private investors to purchase the debt owed to vendors and collect that interest penalty.

Speaking to a Senate budget committee Tuesday, Mendoza said the state is nearly caught up on its bill backlog and that those two programs are no longer needed.

“This program has allowed private lenders to loan money to state vendors, then rake in the 12 percent interest that state taxpayers were on the hook for with these late bills,” Mendoza said. “Now happily the days of connected private lenders profiting off the state’s financial problems can and should be over.”

Mendoza was referring to a 1993 law known as the Prompt Payment Act, which says that whenever the state fails to pay a bill within 60 days, the state must pay an interest penalty of 1 percent per month, or 12 percent per year.

During the height of the two-year budget impasse that stretched from 2015 to 2017, the backlog of past due bills climbed to as high as $16.7 billion, with interest penalties accruing on those bills. So in 2016, lawmakers authorized the Vendor Payment Program, which authorized “qualified purchasers” – typically, wealthy investors – to purchase the bills by paying off the principal owed to those vendors, then collecting that money back from the state with 12 percent interest.

In 2020, however, some of the investors taking part in the payment program criticized Mendoza for paying off the principal owed to the vendors, but not paying off the interest owed to the investors.

Mendoza’s spokesperson, Abdon Pallasch, said Tuesday that more than $665 million in interest penalties have now been paid to those investors and that about only $41 million is still owed to them.

Meanwhile, the state’s bill backlog is now down to about $3.6 billion as of Tuesday.

That includes about $900 million in late health care bills from the state’s group health insurance plan, which Gov. JB Pritzker has proposed paying off in next year’s budget. Bills paid out of the state’s General Revenue Fund, Mendoza said, are now paid, on average, within 17 days of being received by her office.

With the state’s cash flow problems now largely ironed out, Mendoza said, she believes it is time to phase out the Vendor Payment Program, and she said she believes the Prompt Payment Act has failed to achieve its purpose.

“I understand that the intent of the act is supposed to have a deterrent effect on budget makers that forces them to keep a budget living within its means,” she said. “However, I would argue that this interest expense is not penalizing state government, it penalizes taxpayers.”

She said that during the budget impasse, the state paid out more than $1 billion in interest penalties, something she said was proof that the penalties did not force lawmakers or other state officials to be more disciplined with their budgets.

“The days of taxpayers being on the hook for billions of dollars in late payment interest penalties should be over at a time when we finally have our heads above water,” she said. “It is now when we need to take a hard look at what happened and to reform our policies so that taxpayers are not having to pay for these exorbitant costs.”

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