The Undeniable Corruption of Chicago and Illinois: part 4 - Unpaid Vendors Program
by meep
Now we’re opening up to larger issues — to wit, Illinois finances, not only Chicago.
In my prior corruption post, we had the following story:
Brian Hynes: The political insider in the middle of FBI’s Solis investigation
Over the past decade, attorney Brian F. Hynes has gone from being a clout-heavy lobbyist to running a business that’s making him a fortune off of unpaid bills owed by the state of Illinois.
Over the past decade, attorney Brian F. Hynes has gone from being a clout-heavy lobbyist to running a business that’s making him a fortune off of unpaid bills owed by the state of Illinois.
….
Hynes’ name repeatedly pops up in a 2016 FBI affidavit obtained by the Chicago Sun-Times that authorities filed to win approval for search warrants for Solis’ home and offices after secretly listening in on thousands of the alderman’s cellphone calls.The affidavit outlines a series of financial transactions an FBI agent says show that Solis was getting money from Hynes in exchange for the alderman supporting development projects — an assertion Hynes denies.
“It doesn’t surprise me that I’m mentioned there,” Hynes says in an interview with the Sun-Times. “I talked to Danny all the time. He called me and asked for advice. If there’s 20,000 phone calls, I’m probably on 3,000 of them. He was and is a friend, and I tried to help him.
….
Hynes has found himself in the midst of a political scandal before. He drew the attention of federal investigators for arranging for then-Gov. Rod Blagojevich’s wife Patti Blagojevich to receive a $40,000 commission in 2003 from a real estate deal on which she did no work, court testimony showed.Hynes never was charged in the scandal but has a close relationship with Antoin “Tony” Rezko, the political fixer who went to prison for attempting to extort money from businessmen seeking deals including pension investments from the state.
….
Nine years ago, Hynes went into business with Solis’ sister Patti Solis Doyle, a former campaign honcho for President Bill Clinton who later was a top adviser to Hillary Clinton. They set up a company that fronts money to vendors that are owed by the state of Illinois, collecting the interest when the state eventually pays up.Hynes says the alderman’s sister left the company in the fall of 2016, shortly before Hillary Clinton lost the presidential election to Donald J. Trump.
Now, that was a piece of information I didn’t know, as I did not understand how so many vendors to Illinois kept doing business with the state, when they weren’t getting paid their bills for months.
AN OLD MYSTERY NOW SOLVED
I was writing about this even before Rauner became governor, and before STUMP came into being.
Back in 2013: No, Really, Illinois Vendors – Require Cash
As per yesterday, it’s not an accident that Illinois has almost $10 billion in unpaid bills.
It’s their actual budget policy:
….
Look, Illinois is telling you ahead of time that you are at the end of the queue. State workers will get paid before you do (let us ignore pensions for right now). All sorts of money will get slushed around, and as a matter of course, if they can screw suppliers, they will screw suppliers.The accounts payable for Illinois has only increased in the past year, even given the “temporary” tax hike. It seems unlikely that that balance is going to go down, which means whoever still has bills outstanding when the state finally explicitly starts defaulting on liabilities is going to be left in the lurch.
So take that into consideration when doing business with Illinois.
What I didn’t realize was that some players were “advancing” the payments to the vendors… and that because they always built in interest to pay for the overdue bills, the money people who made it work knew they had a pretty sweet “guaranteed” interest rate.
April 2013: Illinois Vendors and Other Operating Expenses to Go On Credit Card
After last month’s posts, Illinois Vendors, Ask for Cash on the Barrelhead and No, Really, Illinois Vendors — Require Cash, we see there may be good news for vendors currently owed money from the state of Illinois.
They’re going to put it on the credit card:
….
Having to issue long-term bonds to pay operating expenses is a REALLY BAD SIGN.Long-term, general obligation bonds, from principles of sound finance, should be issued only for capital expenditures. Chances are pretty good that this backlog does not represent capital expenditures.
Now, issuing debt for operating expenses is not necessarily bad — if it’s short-term debt and it’s just a timing of cash flow problem. For example, I have a very lumpy cashflow stream in and out. I will have cash inflows twice the usual some months, and outflows (such as this month) much greater than usual. The fluctuations in the inflows and outflows do not match, so sometimes the credit card bills for groceries do not get paid off for a month or two.
But I’m not trying to refinance my current grocery bills with a 30-year loan.
Back in 2015, Mish looked at the unpaid bills:
Illinois is in serious fiscal trouble. Unpaid bills will hit about $10.5 billion later this year, counting unpaid lotto winners and state university bills.
Lotto is a small problem overall, yet symbolic of the mess the state is in.
Because Illinois has no current budget, the state does not pay lotto winners. Instead it sends the winners IOUs. Yesterday, two Illinois lottery winners filed a class action lawsuit over unpaid prizes.
At the time, I couldn’t understand why vendors kept doing business with Illinois.
In some of the cases, I understood that the vendors did not have much choice: Illinois was their only “customer”.
But I couldn’t see how these businesses, especially the ones where Illinois was the sole customer, kept going.
I didn’t know about Mr. Hynes’s company, though I should have guessed something like that existed.
CONNECTION TO NICHOLAS NICKLEBY
I haven’t started posting videos about Nicholas Nickleby yet – my Dickens novel for February – but I remembered one specific item. The main villain of the piece is Ralph Nickleby — brother to the deceased Nicholas, and uncle to the living Nicholas. Ralph Nickleby is a money-lender, and he gives money to various people… for the unpaid bills they have in hand.
Think of the companies that come after you for unpaid bills — they usually pay the creditors cents on the dollar, and try to make it back up.
Here is an example scene, from chapter 34:
‘What DO you want, man?’ demanded Ralph, sternly.
‘Demnition discount,’ returned Mr Mantalini, with a grin, and shaking his head waggishly.
‘Money is scarce,’ said Ralph.
‘Demd scarce, or I shouldn’t want it,’ interrupted Mr Mantalini.
‘The times are bad, and one scarcely knows whom to trust,’ continued Ralph. ‘I don’t want to do business just now, in fact I would rather not; but as you are a friend—how many bills have you there?’
‘Two,’ returned Mr Mantalini.
‘What is the gross amount?’
‘Demd trifling—five-and-seventy.’
‘And the dates?’
‘Two months, and four.’
‘I’ll do them for you—mind, for YOU; I wouldn’t for many people—for five-and-twenty pounds,’ said Ralph, deliberately.
‘Oh demmit!’ cried Mr Mantalini, whose face lengthened considerably at this handsome proposal.
‘Why, that leaves you fifty,’ retorted Ralph. ‘What would you have? Let me see the names.’
‘You are so demd hard, Nickleby,’ remonstrated Mr Mantalini.
‘Let me see the names,’ replied Ralph, impatiently extending his hand for the bills. ‘Well! They are not sure, but they are safe enough. Do you consent to the terms, and will you take the money? I don’t want you to do so. I would rather you didn’t.’
Imagine instead of having to run after small debtors, you had the state… and the people voting on the money (interest paid, etc.) are your buddies.
Wouldn’t that be a sweet deal?
VENDOR PAYMENT PROGRAM
It’s all so regular now – it’s even got its own webpage, all official and everything, with various companies qualified to front money to the vendors while they await full payment.
We don’t need to take a look at all these companies. This is the one founded by Brian Hynes.
Let’s check his press!
From July 2013: Vendor Payment Program still has only one purchaser
In late 2011, the state set up a program to help businesses and other vendors caught up in the government’s chronic late payment of bills. Called the Vendor Payment Program, it allows qualified contractors and not-for-profit organizations to quickly get most of the money they are owed by the state, and all of it eventually. Money is paid to the vendors by a private firm that is then entitled to whatever penalty payments are owed by the state, as well as the amount originally owed to the vendor.
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Nearly two years into the initiative, though, only one private firm has been certified by the state to buy the vendor invoices — Chicago-based Vendor Assistance Program LLC.The program is run through the Department of Central Management Services.
“Vendor Assistance Program, LLC is currently the only company authorized by CMS to facilitate this program,” said CMS spokeswoman Anjali Julka in an emailed statement. “To date, CMS has met with more than 20 companies regarding the (program) and several have expressed an interest in joining the program. CMS anticipates announcing several new participants in the near future.”
Meanwhile, Vendor Assistance Program LLC said business is going well and expected to get better.
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No savings to stateThere are conditions on which vendors can take part in the program. For example, medical assistance invoices do not qualify. Bills must be eligible for late-payment penalties, and they must be at least 90 days past due.
The CMS website for the program — illinois.gov/cms/business/VendorPayment/ — says the process is initiated when a vendor registers with a qualified purchaser. At this time, that is VAP.
The agreement calls for the purchaser to immediately pay the vendor 90 percent of what the state owes. CMS says payments are made about seven to 10 days after a purchaser agrees to buy an invoice.
The remaining 10 percent is paid when the state pays the purchaser the full invoice amount plus any late-payment penalties that are due. Under the state’s Prompt Payment Act, a bill not paid within 90 days is subject to an interest penalty of 1 percent a month on the unpaid amount.
The program doesn’t save the state money, because it would owe the late-payment penalties to the vendors rather than the purchaser of the invoices. However, the program does allow the vendors to get paid more quickly than they otherwise might have been.
Indeed.
Let me assume that compounds normally.
A 1% per month charge will compound to 12.7% in a year. You see any government interest rate that high? A 1-year rate at 12.7%?!
THAT’S A PRETTY SWEET DEAL, EH?
Take a look at the end of the article:
“I had heard about this (Vendor Payment Program), and I’m very leery because I don’t want to give up a penny. I think, ‘What is this going to cost me?’” Martin said. “I checked into it and met with the people and really it didn’t cost me anything.”
Before trying the Vendor Payment Program, Martin said, she tried to find someone else to buy the invoices, but they wanted “beaucoup interest.”
“It helped me keep the doors open,” Martin said of the state program. “It gave us time to regroup.”
Martin said she hasn’t had to use the program for a while, as funding from other sources has improved and the organization has taken other steps to shore up its budget.
“But the thought that I know they’re there is a relief,” Martin said. “I can sleep at night now a little better.”
Well, she’s foregoing that almost-13%-per-year interest. But yes, most people actually running businesses need liquidity.
To be fair, there are some risks in running a business like this — they need to make sure that those applying for the advances are legit state vendors who will almost definitely get paid once the state gets around to paying its overdue bills. There’s various checking that needs to be done.
One of the risks, as well, is assuming that the state will actually pay that 1% per month penalty.
There’s the political risk that the politicians no longer play along.
So it helps to be very politically connected.
AN OLD PIECE WITH HYNES
One more item that involves Brian Hynes. Back in April 2018, I had a post, part of which involved the unpaid bills of Illinois.
UNPAID BILLS
This is just gonna be a link dump about Illinois’s unpaid bill situation.
Before I dump, though: THIS IS NOT NEW. I watched this crap going on when I was blogging at somebody else’s site, AT LEAST 8 YEARS AGO.
So excuse me if I’m annoyed.
So I’m looking at some of the stories from that time.
Bill Bergman at Truth in Accounting had some questions:
The state’s unpaid bill backlog stood at $9.2 billion at the end of January [2018], roughly unchanged from the previous months’ report. But the latest report also identified “interest penalties” of $946 million. That amount was reported last month as $887 million—a 7 percent increase in a single month, despite the roughly unchanged bill backlog.
On the surface, interest penalties may sound like an expense on the income statement. But in the paragraph describing the $946 million in interest penalties, it is more completely identified as “the overall aggregate of accrued and pending late-payment interest penalties.” In other words, it is an amount owed, not paid.
Unfortunately, we are also told not to expect improvement on this score. Last month’s report concluded this discussion with a brief sentence: “The balance of owed interest is expected to continue to grow.” This month, the closing line is “The balance of owed interest is expected to grow as payment delays continue.”
Here are three questions raised by this report:
Does Illinois pay late payment interest on delayed interest penalty payments?
Are complaints from vendors about slow state payments a cover for what is really a lucrative loan operation, one the mob would envy, at taxpayer expense?
Who are these vendors, and should they be identified by name in the “Debt Transparency Report?”
Now, let’s be fair: 13% per annum interest rate ain’t Mafia-level rates. But then, the Mafia assumed that sometimes they wouldn’t get paid.
Here was the state comptroller’s report — you know, Susana Mendoza, one of the many candidates for mayor of Chicago.
I found another story where Brian Hynes was specifically named, from April 2018 – Illinois’ Late Fees Skyrocket Over Past 3 Years
Illinois has racked up more in late-payment fees in less than three years than it did in the 18 years combined, according to a report released Tuesday, and some major creditors say they’ve waited more than a year to receive the interest they’re owed.
The report by state Comptroller Susana Mendoza found that the $16 billion in past-due debt that piled up during a two-year budget stalemate comes with a steep price. Since July 2015, Mendoza reported, prompt-payment penalties have totaled $1.14 billion, $100 million more than the total from 1998 up to then.
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Earlier Monday, private companies, which have kept government vendors afloat by paying their bills and relying on state reimbursement with interest, told lawmakers they’ve waited months for late-penalty payments, threatening the program.…..
Vendor Assistance Program, one of the qualified purchasers, began buying overdue vendor invoices even before the program was authorized by state law in 2012. Founder Brian Hynes said that since 2010, his firm has financed $4 billion but received only $65 million in prompt payment penalties and is awaiting $250 million more.“At some point,” Hynes said, “you have to remember that these qualified purchasers helped sustain the state through a difficult time.”
In any case, this is not necessarily a case of corruption (with respect to Brian Hynes specifically)…but if you’re dealing with an iffy payor, it does help to kick back a little money, to campaign funds.
To be sure, I did a little digging on opensecrets.org, and the donations don’t seem excessive to me – I’ve done digging for others before, and Brian Hynes’s donations (and some are listed from Florida, and some from Illinois) don’t really add up to a huge amount. Maybe he bundles – this record wouldn’t tell me so.
But just be thinking: these interest penalties are a lot higher than the 1-year borrowing rate, even for Illinois.
Where there’s money…
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