Desperate Illinois To Borrow From Fed’s “Lender Of Last Resort” Facility A Second Time
Tue, 10/13/2020 – 11:20
Illinois is set to borrow several billion from the Federal Reserve’s Municipal Liquidity Fund (MLF) for a second time if a new U.S. stimulus package and a progressive tax hike scheme for Illinois don’t come through, according to comments from Illinois Gov. J.B. Pritzker. Illinois already borrowed $1.2 billion from the MLF earlier this year in an attempt to close some of the state’s 2020 budget shortfall.
The borrowing is significant since Illinois is the only state in the country to tap the MLF. The Fed created the MLF in April to be a “lender of last resort,” where cities, states and other government entities can go if they can’t raise money as a result of COVID-19. The governor’s comments are an admission that the normal financial markets aren’t willing to lend money to Illinois at competitive terms.
Normally, billions are raised by cities and states in the municipal bond market, where banks, insurance companies and all types of financial entities lend money directly to governments. But COVID put all that at risk, leading the Fed to step in to make sure governments had somewhere to go if the markets weren’t working.
Fortunately, despite some initial hiccups early on in the pandemic, the financial markets have worked just fine. Billions have been raised by cities and states across the country without having to tap the Fed.
The only exception so far, when it comes to city and state governments, is Illinois. The state borrowed from the MLF in June after the state failed to successfully raise $1.2 billion from the markets one month earlier. New York’s Metropolitan Transportation Authority is the only other borrower in the country to tap the MLF.
COVID-19 has brought to full view all of Illinois’ pre-pandemic problems. The increased stress is highlighting Illinois’ extreme outlier position nationally when it comes to finances, notably pension debts and the state’s unwillingness to reform. Gov. Pritzker continues to count on a federal bailout and more tax hikes to keep the state afloat, but neither will reverse the problems of overwhelming pension costs, the “nation’s least-tax-friendly-state” status and the increasing outmigration of Illinois residents. Wirepoints laid out the state’s outlier status in its recent special report linked here.
Fiscal reality kicks in
Fiscal reality began setting in for Illinois after the state was forced to pay punitive rates when it borrowed $800 million from the markets in May. Illinois’ borrowing rate then was 5.65 percent, five times higher than what well-run, AAA-rated states were paying to borrow money – around 1.1 percent.
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