By: Ted Dabrowski
Illinois has abandoned hopes of affordably raising $1.2 billion from the bond market and has turned, instead, to a new Federal Reserve lending program known as the Municipal Liquidity Facility. Illinois will raise the money for one year from the Fed at a rate of 3.83 percent. The funds are meant to cover some of the expenses due to the economic shutdown and the postponement of income tax collections.
Illinois will be the first state to tap the new facility at the Fed, which is meant to be a lender of last resort.
From the Federal Reserve’s FAQ on the lending facility:
The Federal Reserve must obtain evidence that participants in the MLF are unable to secure adequate credit accommodations from other banking institutions. In certifying whether the issuer is unable to secure adequate credit accommodations from other banking institutions, issuers may consider economic or market conditions in the market intended to be addressed by the MLF as compared to normal conditions, including the availability and price of credit. Lack of adequate credit does not mean that no credit is available. Lending may be available, but at prices or on conditions that are inconsistent with a normal, well-functioning market.
The state originally attempted to raise the $1.2 billion from the bond market in May, but it could not find acceptable terms. The deal was postponed and then put on a day-to-day basis. The state announced yesterday that it would close the deal with the Federal Reserve on Friday.
The move to tap the fed is likely to be seen as another desperate move by the state. Last month Illinois passed a budget that relies on up to $5 billion in federal loans and grants to cover a $6.1 billion deficit. The budget, which S&P criticized as “structurally misaligned,” included no cuts or spending reforms on its way to spending $42.9 billion, a record amount for the state.
And back in April, State Senate President Don Harmon and the Democratic caucus asked the federal government for a direct bailout. The caucus used the negative impact of the coronavirus to plead for $42 billion in funds, including $20 billion for pensions. That in turn prompted U.S. Senate President Mitch McConnell to suggest bankruptcy as an alternate solution for states like Illinois.
Illinois’ debt has already been trading at junk levels, as we recently covered in Trading at junk levels: Illinois borrowing costs 5 times higher than AAA-rated states. Illinois’ penalty rate – how much more the state pays compared to AAA-rated states – recently jumped to a high of 4.50 percentage points.
Keep an eye on the Fed facility to see what other states use it as a source of funding. Expect few to use it. Illinois might find itself in a lonely spot.
Read more about Illinois’ fiscal crisis:
- Trading at junk levels: Illinois borrowing costs 5 times higher than AAA-rated states
- No cuts, record spending, and hoping for a bailout. Eight things you need to know about Illinois’ 2021 budget
- Big raises for Chicago Teachers Union, state’s AFSCME shows where federal aid to Illinois will end up
- Illinois delays $1.2 billion bond issue. Will it tap new Federal Reserve program?