By Ted Dabrowski of Wirepoints<\/p>\n
Illinois has announced\u00a0$2 billion more<\/a>\u00a0in additional borrowing from the Federal Reserve Bank\u2019s Municipal Liquidity Facility (MLF). Gov. J.B. Pritzker has\u00a0informed the Fed<\/a>\u00a0of the state\u2019s 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.<\/p>\n While the presence of the Fed facility is credited with bringing stability to the municipal markets, the reality is only\u00a0one state<\/a>\u00a0or 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\u2019s Metropolitan Transit Authority is the only other government in the country to borrow from the MLF.<\/em>)<\/p>\n Illinois\u2019 increased reliance on borrowing follows the public\u2019s\u00a0rejection of a $3.1 billion tax hike<\/a>\u00a0referendum on Nov. 3. More debt, in the absence of major spending reforms, means a junk rating is\u00a0increasingly likely<\/a>\u00a0for Illinois. No state in modern history has ever been rated junk.<\/p>\n Illinois\u2019 legislature authorized in the spring\u00a0up to $5 billion in borrowings<\/a>\u00a0from the Fed to cover the state\u2019s 2021 shortfalls, but Gov. Pritzker recently said:<\/p>\n \u201cI 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.\u201d<\/i><\/p><\/blockquote>\n 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\u2019s recently said in an October report, \u201c[Illinois\u2019] 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.\u201d<\/p>\n All three agencies rate Illinois just one notch above junk and all have\u00a0a negative outlook<\/a>\u00a0on the state. In fact, Illinois bonds have already been trading\u00a0at junk-level interest rates<\/a>\u00a0for some time.<\/p>\n Illinois already\u00a0tapped the MLF once<\/a>\u00a0in June after the state was\u00a0unsuccessful in raising $1.2 billion<\/a>\u00a0from the municipal market at favorable conditions. The $2 billion will be the state\u2019s second borrowing from the MLF.<\/p>\n The state\u2019s budget hole in 2021 is reportedly at\u00a0$4 billion<\/a>, while its\u00a0unpaid bills<\/a>\u00a0currently total $7 billion. That\u2019s on top of a Moody\u2019s-estimated\u00a0$261 billion<\/a>\u00a0shortfall for Illinois\u2019 five state-run pension plans, and\u00a0$56 billion in unfunded<\/a>\u00a0state retiree health insurance obligations.<\/p>\n Since the rejection of the progressive tax hike by the public, state officials\u00a0have yet to put together<\/a>\u00a0a financial plan that shows how it will deal with its short-term financial needs. The state\u2019s planned legislative sessions in November and December\u00a0were cancelled<\/a>\u00a0due to COVID, meaning nothing will get done before year end.<\/p>\n 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\u00a0a \u201cfantasy,\u201d<\/a>\u00a0saying 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:\u00a0Solving Illinois\u2019 Pension Problem: Why Pension Reform is Legal<\/a>. (Other parts of Wirepoints\u2019 reform plan are at the site\u00a0Pension Solutions<\/a>.)<\/p>\n Moody\u2019s has also said it would regard pension holidays and reamortizations as a credit negative: \u201cUnderfunding pensions again could lead to further credit deterioration, depending on the degree of underfunding, the state\u2019s other financial strategies and the performance of its pension investments.\u201d<\/p>\n 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\u2019 structural problems and to avoid an eventual junk rating.<\/p>\n Reforms in Illinois were once seen as impossible, but they are quickly becoming inevitable.<\/p>\n