Editorial: Time to adjust state's late fees on past-due bills, and make sure vendors get them

Two state laws requiring that interest be paid to Illinois' vendors on past-due bills need adjustments, at least

This editorial has been modified from the original version to clarify that the comptroller's proposal would lower, but not repeal altogether, the interest rate on late state payments.

Illinois Comptroller Susana Mendoza is proposing to modify a law that has the state paying vendors interest when it's late paying bills, as well as a law that allows private investors to buy the overdue bills and collect that interest. We understand why.

The first law was created in 1993. It says if the state is past due paying a vendor, it must pay 1% per month extra in interest. That works out to a 12% APR. In the past, the vendors were not likely to get that much, because the overdue bills would be paid well within a year. That's until the past-due backlog that came with the infamous state budget impasse of 2015-17, when it got so bad that lawmakers created the "Vendor Payment Program," a way to get the bills paid with a reward to the investors paying them.

The good news about that: The vendors got their money. The bad news: It cost the state $1 billion in interest, Mendoza says, because the past-due bills climbed as high as $16.7 billion. More bad news: About $700 million of that interest went or will go to the investors, not the vendors.

Mendoza wants to lower the interest payments and phase out the investment program, saying the bills are now nearly caught up. Except they're not; there's still around $3.5 billion due, though Mendoza argues that bills out of the general fund are paid within 17 days on average.

"This program has allowed private lenders to loan money to state vendors, then rake in the 12% interest that state taxpayers were on the hook for with these late bills," Mendoza said. She argues those investors were connected. Whether they were or not (wink wink), she has a good point.

"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."

Another good point. The huge amount of interest paid - $1 billion, "poof," as Mendoza says - only added to the big debt.

But it's true, that's how debt works. Vendors, from lawn services to the county treasurer, often impose on us regular people a "1% per month late fee" or even 1.5%. It's not an outrageous concept.

Yet a 12% APR is a little steep. To that end, state Sen. Laura Murphy, a Des Plaines Democrat, a year ago proposed reducing that rate to the greater of 0.25% a month, for a 3% APR, or twice the annual percentage increase in the consumer price index.

The Republican running for Mendoza's job, Shannon Teresi, and others say the interest charge should remain as a deterrent to keep lawmakers from overspending in the future. And some say the Prompt Payment Act helps keep vendors from abandoning Illinois for fear of not getting paid.

In the end, yes, bills should be paid on time. When they're not, paying vendors a late fee along the lines of what Murphy suggests is reasonable. But the program that's allowing investors to collect vendors' interest only arouses suspicion and should go.

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