Illinois To Borrow Another $2 BIllion From The Fed, Only State To Do So

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by Tyler Durden
Saturday, Nov 28, 2020 - 12:35 PM

By Ted Dabrowski of Wirepoints

Illinois has announced $2 billion more in additional borrowing from the Federal Reserve Bank’s Municipal Liquidity Facility (MLF). Gov. J.B. Pritzker has informed the Fed of the state’s intention to borrow the funds before the facility expires at the end of December. The facility was put in place by the CARES act as a backstop for governments hit by financial market disruptions due to COVID.

While the presence of the Fed facility is credited with bringing stability to the municipal markets, the reality is only one state or city in the entire country has borrowed from the facility since its inception: the state of Illinois. All others have successfully raised billions from the traditional markets during the pandemic (New York’s Metropolitan Transit Authority is the only other government in the country to borrow from the MLF.)

Illinois’ increased reliance on borrowing follows the public’s rejection of a $3.1 billion tax hike referendum on Nov. 3. More debt, in the absence of major spending reforms, means a junk rating is increasingly likely for Illinois. No state in modern history has ever been rated junk.

Illinois’ legislature authorized in the spring up to $5 billion in borrowings from the Fed to cover the state’s 2021 shortfalls, but Gov. Pritzker recently said:

“I am very reluctant to saddle our state with that large amount of short-term debt. I believe it would be irresponsible to borrow that entire amount, given the persistent fiscal pain it would cause over the next three years, as we would struggle to repay that entire amount. Our collective intention is to repay this line of credit as early as possible, after either the awarding of stimulus by Congress or a sufficient recovery of state revenues.”

Said another way, $5 billion in additional debt, with such a short repayment period, would likely trigger the credit rating agencies to act sooner than later. Moody’s recently said in an October report, “[Illinois’] ability to weather the coronavirus pandemic without hurting its credit quality will require keeping growth of its long-term liabilities within its capacity to pay.”

All three agencies rate Illinois just one notch above junk and all have a negative outlook on the state. In fact, Illinois bonds have already been trading at junk-level interest rates for some time.

Illinois already tapped the MLF once in June after the state was unsuccessful in raising $1.2 billion from the municipal market at favorable conditions. The $2 billion will be the state’s second borrowing from the MLF.

The state’s budget hole in 2021 is reportedly at $4 billion, while its unpaid bills currently total $7 billion. That’s on top of a Moody’s-estimated $261 billion shortfall for Illinois’ five state-run pension plans, and $56 billion in unfunded state retiree health insurance obligations.

Since the rejection of the progressive tax hike by the public, state officials have yet to put together a financial plan that shows how it will deal with its short-term financial needs. The state’s planned legislative sessions in November and December were cancelled due to COVID, meaning nothing will get done before year end.

The governor and the legislature have also shown no inclination to deal with the larger pension crisis. The governor earlier this year even went as far as to call the pursuit of a pension amendment and pension reform a “fantasy,” saying any reforms would be struck down at the federal level. The governor is likely unaware that both Rhode Island and Arizona have successfully reformed their pensions in recent years, with neither running afoul of the federal Contracts Clause. Wirepoints has covered the legality of reforms, including details of the reforms in both states, in its recent report: Solving Illinois’ Pension Problem: Why Pension Reform is Legal. (Other parts of Wirepoints’ reform plan are at the site Pension Solutions.) 

Moody’s has also said it would regard pension holidays and reamortizations as a credit negative: “Underfunding pensions again could lead to further credit deterioration, depending on the degree of underfunding, the state’s other financial strategies and the performance of its pension investments.”

With the options to borrow, tax and postpone debt repayments being taken away from them, Gov. Pritzker and the legislature must begin to realize they can no longer avoid real reforms, starting with a push for a pension amendment. Sure, another stimulus round may provide some temporary relief, but it will do nothing to fix Illinois’ structural problems and to avoid an eventual junk rating.

Reforms in Illinois were once seen as impossible, but they are quickly becoming inevitable.