Broke State Illinois Pleads for Fiscal Bailout, Takes More Money from Federal Reserve

Posted on 11/29/2020


Even before the COVID-19 lockdowns, the State of Illinois struggled to balance its books. In April 2020, Standard and Poor’s Global Ratings and Moody’s Investors Service slashed Illinois’ credit outlook to “negative” from “stable” over COVID-19’s impact on the state’s fiscal budget. Essentially the State of Illinois is teetering on the line that could make it non-investment grade debt. Illinois is home to Chicago, a major city known for commodities and financial markets. Illinois remains the worst-rated state in the United States with US$ 137 billion of pension debt and roughly US$ 7 billion of unpaid bills.

Luckily for the State of Illinois, the U.S. Federal Reserve has a credit facility to help out states and districts, which is controversial to the point of having the federal government help bailout state finances. Illinois has announced US$ 2 billion more in additional borrowing from the Federal Reserve Bank’s Municipal Liquidity Facility (MLF). Illinois already borrowed US$ 1.2 billion from the MLF and has repaid US$ 200 million of that loan. Backed by the CARES Act, the Municipal Liquidity Facility provides a lifeline for state governments. Illinois Governor J.B. Pritzker notified the Federal Reserve of the State of Illinois’ intention to borrow the funds before the facility expires at the end of December 2020. The mere presence of the Municipal Liquidity Facility calmed the municipal bond markets earlier in the year. Only one state has borrowed from the facility – that’s the State of Illinois. Besides Illinois, New York’s Metropolitan Transit Authority is the only other government in the country to borrow from the MLF. Other state governments and municipal authorities were able to tap markets on their own without the facility.

Governor Pritzker plans to have the state payback the line of credit through pandemic stimulus money (waiting for the bill) or recovery of state revenues after a vaccine becomes available.

Keywords: Federal Reserve System.

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