SPRINGFIELD -- Trying to find ways to stop the bleeding by social service providers it is not paying on time, the state of Illinois last month allowed a handful of vendors to sell financial institutions the rights to their overdue payments. 

SPRINGFIELD -- Trying to find ways to stop the bleeding by social service providers it is not paying on time, the state of Illinois last month allowed a handful of vendors to sell financial institutions the rights to their overdue payments.

The pilot program, which began Oct. 12 and ended Oct. 22, was limited to vendors owed money by the state Department of Human Services during fiscal 2010, which ended June 30. But Gov. Pat Quinn’s administration plans to expand the initiative to all departments.

“We thought this was a good way to protect jobs and maintain vital services people depend upon,” said Kelly Kraft, a spokeswoman for the governor’s budget office.

The program is “an effort to counter the negative effects that state vendors are experiencing due to the delay in payment of approved vouchers and to ensure faster payment,” according to its terms sheet on the state’s website.

But the pilot program was not publicized, Kraft said. It was offered to vendors who called the state seeking faster payments. Twenty vendors signed up, and six were accepted. Those six received a total of $310,000 from financial institutions they were paired with. The names of the six organizations were not available.

“That’s not a lot of money, but at least it’s something to help out the vendors in the meantime,” Kraft said. “We do look at the pilot program as a success.”

Human Services was chosen to participate because “a lot of our past-due bills are through DHS,” Kraft said. “We didn’t publicize it just because it was a pilot program.”

 

Under the radar

One of the six banks listed on the program’s informational website said it did not participate.

“I would be the one to sign off on it. I don’t know how our name got on the list,” said Herman Davis, president and chief operating officer of Covenant Bank, a Chicago-based institution. “People assume because we’re a community development-certified bank that we participate in all these programs. That is not one of them.”

Sara Howe, chief executive officer of the Illinois Alcoholism and Drug Dependence Association, said the governor’s chief of staff had mentioned in September that the state was looking for ways to help vendors, she hadn’t heard anything else.

“It may be under the radar,” Howe said. “That would be something. It’s promising.”

The IADDA represents more than 50 prevention, treatment and recovery organizations across Illinois.

 

Payments ‘drying up’

Illinois’ pile of unpaid bills has been a problem for more than two years. On average, the state is five to six months behind in what it owes vendors, Kraft said. The IADDA reported this week that its agencies’ unpaid bills had gone from a total of $34 million at the beginning of October to $46 million in November.

“Payments to providers are drying up,” Howe said. “Our agencies have essentially drained their lines of credit and exhausted their ability to guarantee paychecks to employees who are critical to the state’s prevention-and-treatment system.”

Under the pilot program, vendors could sell all rights to payments owed them to a third-party financial institution — a “qualified purchaser” in bureaucratic parlance — approved by the state.

The initiative was made possible through an emergency administrative rule change by the Department of Central Management Services and the comptroller’s office. The rule allows vendors to reassign their rights to payment to third parties, according to the website terms sheet.

The financial institutions’ incentive to buy the debt is that they ultimately will receive the interest owed to service providers under the state’s Prompt Payment Act. The law provides that if a payment is not made to a vendor within 60 days of receipt of an invoice, the state owes 1 percent (or 2 percent in limited cases) per month of delay.

Anyone owed payment under the state and federal Medicaid program is excluded from participating because of federal law. The rules of the federal stimulus program, which provides states with more Medicaid money, already specify that payments be made within 30 days to hospitals, nursing homes and doctors.

 

Chris Wetterich can be reached at 788-1523.

 

How it works

1. A vendor applies online and asks to sell its accounts receivable to a qualified buyer. The vendor signs over its rights to the accounts receivable and to all Prompt Payment Act interest to the buyer.

2. A buyer verifies that the vendor’s voucher is valid and writes the vendor a check for 90 percent of the money owed by the state. Ten percent is held in reserve in an interest-bearing “custodial” account.

3. The state eventually pays the buyer the full value of the voucher plus all Prompt Payment Act interest owed. The buyer releases the remaining 10 percent to the vendor.

4. If the state exercises any offset or contractual rights and does not have to pay the buyer the full amount in the invoice, the buyer can subtract the difference from the custodial account before those funds are turned over to the vendor.

 

Special provisions

1. Buyers are not obligated to buy more than $100,000 worth of debt owed by the state.

2. Buyers have to submit a monthly written report to the governor’s Office of Management and Budget detailing:

-- Debt they have bought from vendors

-- Money they have received from the state toward the principal they are owed

-- Interest they have received under the Prompt Payment Act

-- How much they are owed by the state

3. A consortium of buyers has set up a website with more information and application details: www.vendorassistanceprogram.com.