Illinois passes budget that hinges on borrowing through Fed program
Illinois lawmakers passed a $40 billion budget for fiscal 2021 that relies on up to $5 billion of borrowing through the Federal Reserve’s new short-term borrowing program.
The budget package authorization for up to $5 billion borrowing through the Fed’s Municipal Liquidity Facility passed along party lines, with Gov. J.B. Pritzker and fellow Democrats calling it the best among a series of bad options to deal with tax losses because of the COVID-19 pandemic and to avoid deep cuts at a time when government services are in high demand.
Republicans blasted the budget as fiscally irresponsible and called on Democrats to cut spending instead.
“What we’ve heard today is a budget that is balanced only on a wing and a prayer... it relies on $5 billion in borrowing or magical revenue that comes from the federal government with no strings attached,” warned state Rep. Tom Demmer, R-Dixon.
Passing a budget that banks on federal help is an “enormous gamble,” said Sen. Dale Righter, R-Mattoon.
“This budget begins to address the financial upheaval we are facing, but more hard choices about how to spend and save these dollars wisely remain to be made,” Pritzker said in a statement Sunday.
Pritzker later defended the choice to borrow and depend on future federal funds over spending cuts, layoffs or furloughs that other states have announced in response to plummeting revenues.
“This is not the time to bulldoze the very structures" that support the public and businesses, Pritzker said during a news conference Sunday. “Now is the time when you need government to be there.”
The pandemic has caused widespread unemployment in Illinois and elsewhere with many businesses closed and many customers wary. So for COVID-19 has killed 4,923 people in Illinois, according to data the state Department of Public Health posted Monday.
“There's no doubt that we're going to have to revisit the budget if the federal government doesn't come through. … I think all 50 states are going to have to be revisiting their budgets if the federal government doesn’t come through,” Pritzker said when asked how the state would repay the borrowing if federal aid doesn’t come to fruition.
“We don’t know the depths of the economic hit we’ve taken from this virus, we don’t know how much we’re going to have to spend in order to respond to it," said Senate President Don Harmon, D-Oak Park. "We don’t know whether voters are going to approve a constitution amendment in November. We don’t know how the federal government is going to respond … in the next several months we’re going to know all of that.”
The fiscal 2021 budget authorizes nearly $40 billion in general fund spending with an additional $57.7 billion in spending from federal and other sources. The budget package authorizes $3.6 billion in new capital spending and reauthorizes $41.5 billion of previously approved appropriations.
The $40 billion general fund operating budget for fiscal 2021 doesn't include repayment of the $1.2 billion in short-term borrowing and $400 million of investment fund rollovers by the treasurer's office that are helping wipe out the fiscal 2020 gap.
The budget holds most funding authorizations to fiscal 2020 levels with some exceptions such as public health, which will see an increase due to federal funds approved in the various stimulus and relief packages.
The state last month revised its revenue estimates for the current year down by $2.7 billion and next year by $4.6 billion. The state is relying on a $1.2 billion cash flow issue and interfund borrowing to close this year’s gap, which drives up the fiscal 2021 deficit to about $6 billion. The state will extend its interfund borrowing authority through 2021 and raise the level by $300 million to $1.5 billion.
The state is receiving $4.9 billion from March's Coronavirus Aid, Relief and Economic Security Act to help cover expenses — but not tax revenue losses — with about $3.5 billion going directly to the state and $1.4 billion earmarked for eligible local governments.
The budget makes the state’s full statutorily required pension contribution for fiscal 2021, which falls short of an actuarial level. Along with an insurance contribution it totals $9 billion from the general fund. It includes $267 million toward Chicago teachers’ pensions. The state has $137 billion of unfunded pension liabilities.
Education funding for kindergarten through 12th grade and higher education are held steady. Both had been in line for additional funding under Pritzker’s original pre-coronavirus budget proposal. The higher ed increase and a portion of the K-12 funds were contingent on voters approving a constitutional amendment in November to shift to a graduated income tax from the current flat rate.
The budget poses strains for public schools districts like Chicago Public Schools who were counting on a scheduled $350 million increase in aid based on the funding formula overhaul approved in 2017. The budget instead holds the funding level steady at $7.2 billion.
The approved budget doesn’t rely on the estimated $1 billion a move to a progressive income tax structure is projected to generate.
The budget also gives Pritzker broader discretionary powers to move funds around, authority the administration argued was needed to manage through the public health crisis.
The Coronavirus Urgent Remediation Emergency Borrowing Act, or CURE, is needed because the “state requires greater flexibility to borrow efficiently and respond effectively to urgent financial needs as they arise,” the legislation says.
The legislation authorizes up to $5 billion of borrowing, allowing the state to access the Fed’s MLF or other future programs to cover revenue shortfalls resulting from the pandemic and the state’s emergency response, to cover related costs, to respond to any “other” disaster or emergency or failure of revenues, and to cover issuance expenses.
If the federal government comes through quickly with aid to cover revenue losses, the state might be able to avoid tapping the authorization. If not, it would borrow in hopes of repaying the funds with federal dollars.
The state bill limits the borrowing term to 10 years. The MLF is currently limited to 36 months. The latest relief package approved by the U.S. House expanded the term to 10 years, though it appears dead in the GOP-run Senate.
The legislation expands the state’s short-term borrowing act which authorizes the issuance of cash flow certificates to manage an unexpected decline in revenues to include borrowing in case of “emergencies” that cause a deficit. It also temporarily allows for some borrowing to be sold on a negotiated basis. Existing rules limit the sale to competitive bidding. Traditional short-term certificates would still be required to be repaid in the next fiscal year.
The Pritzker administration previously said it intended to submit a notice of interest to sell its pending $1.2 billion GO-backed certificates through the MLF as Fed officials ready the $500 billion program that will purchase short-term debt from eligible governments. The state has the sale on the day-to-day calendar and may still go with a public sale depending on market conditions.
The Fed recently expanded access to say it would participate in a bid process, as Illinois law requires.
Illinois can borrow at about a 4% rate under the program’s pricing guidance. State spreads are at peak levels — at 400 basis points to the Municipal Market Data’s AAA benchmark and 425 bps on bonds 10 years and out — as the pandemic fuels worries over the state’s ability to hold on to its investment grade ratings. Illinois has access to $9.7 billion under MLF terms.
Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings all rate the state BBB-minus or equivalent the lowest investment grade level, with negative outlooks.
During committee and floor debate, the GOP attacked the borrowing given the uncertainty of federal funds and lack of plan to repay the debt in the absence of federal dollars and questioned whether the additional borrowing capacity allowed for “emergencies” left room for abuse.
"We believe this is responsible. We are hoping the actions we are taking are not ones that trigger additional negative scrutiny from the financial rating agencies because we are attempting to be responsible and pay all of our pension obligations and all of our debt service," said Rep. Greg Harris, D-Chicago.
During the marathon session that ran from Wednesday until the early hours of Sunday, lawmakers also approved changes in the tax structure for a Chicago casino sought by Mayor Lori Lightfoot and signed off on measures to help the public agency that operates the city’s convention center manage the coronavirus-driven collapse of its trade show business.
Update: The original version of the story was updated with more detail on the schedule to repay short-term loans and fund rollovers.