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Avoiding the Bill Collectors

Illinois is one of two states that still has no budget this year. How does it keep running? Partly, by letting its bills stack up.

Illinois law lets the state defer paying bills until the following fiscal year -- a tool the state has used liberally for years. Because of that, the state’s unpaid bills have now climbed to a total of $6.6 billion, a backlog equal to 19 percent of what the state spends from its general fund. “If the state fails to address its structural imbalance for subsequent years,” warned Moody's Investors Service, “the payment backlog will swell to $25 billion, or 64 percent of expenditures” over the next three years.

While this is a glaring sign of the state’s limited cash flow, Moody’s said this week that the backlog “poses little immediate threat to timely payment of principal and interest” on the state’s $27 billion in outstanding general obligation (GO) bonds. That's partly because, as Moody's pointed out, Illinois has about $8.9 billion cash in special funds that could be borrowed to make GO bond payments.

More alarming for credit rating agencies -- and what earned Illinois a downgrade last year -- is the state’s budget deficit, which continues to worsen.

The state has been able to spend some money for fiscal 2016 through court orders, continuing appropriations, statutory transfers and a handful of appropriation bills. But with no decision from lawmakers about where to cut spending or raise taxes, Illinois has so far racked up a $4 billion budget hole for this year. With a gap like that, the unpaid bills take a backseat, which is bad news for the businesses and non-profit organizations that provide goods and services to the state, as well as local transportation agencies and local governments owed money by the state.

State Spending Problems

States that depend on oil and natural gas revenues are facing mid-year budget cuts and will likely have a prolonged debate about how to balance next year’s budget going forward. But oil-dependent states aren't the only ones suffering.

For the second year in a row, Massachusetts had to make emergency mid-year budget cuts that were tied to revenue shortfalls. Connecticut made emergency budget cuts back in September. Mississippi Gov. Phil Bryant is planning to make mid-year cuts and dip into the state’s rainy day fund. And Wisconsin is expecting a revenue shortfall for this fiscal year.

Part of the challenge, said Roy Eappen, a municipal securities researcher for Wells Fargo, is that state expenses are collectively growing faster than their revenues. According to the National Association of State Budget Officers, general fund revenues are projected to increase 2.5 percent this year from fiscal 2015, while general fund spending is expected to increase 4.1 percent.

“[This] fuels the debate as to whether fiscal challenges are a revenue problem or a spending problem,” said Eappen, noting that that precise debate is what has delayed budgets in Pennsylvania and Illinois.

Looking ahead, states might want to plan for tighter spending than they have in recent years. State forecasters are expecting tepid sales and income tax revenue growth for both 2016 and 2017. That's mainly because of stagnant wage growth and lower capital gains revenue following the fizzling of the stock market. In addition, previously scheduled income tax breaks in Massachusetts and Oklahoma this year and in California for 2018 may also stress revenue collections.

Still, Eappen said one area where states will likely increase spending is transportation, now that a federal highway bill is in place for the next five years. Governors in Connecticut, Georgia, New Hampshire and Tennessee have all introduced transportation infrastructure initiatives.

No Big Loss?

Missouri Gov. Jay Nixon this week spoke out for the first time about losing the professional St. Louis Rams football team to Los Angeles County. “It was very disappointing that we followed the guidelines, did what folks said, and that wasn’t enough here,” Nixon told the St. Louis Post-Dispatch. According to the newspaper, Nixon “also consistently -- and ardently -- chastised the NFL for ‘making up reasons’ to allow the Rams to move to Los Angeles.”

Losing a major sports franchise is probably on any public official's Top 10 list of things to avoid on their watch. But financially, St. Louis won’t suffer too greatly, according to an analysis by Moody’s. Although the Rams’ departure results in a $4.2 million annual revenue loss (mainly from sales and amusement taxes), that equates to less than 1 percent of the city’s fiscal 2015 operating revenues.

Moody’s also pointed out that the city will avoid the $150 million cost of funding its share of a new $1.1 billion stadium. St. Louis and the state of Missouri proposed helping to finance more than half the cost of the new stadium, but it turned out to be no competition for a proposed $3 billion entertainment complex just 10 miles from downtown L.A.