Illinois’ finances were already in dire straits before the twin body blows reflected by the coronavirus-related economic lockdown followed by the vandalism and looting sprees that have racked various cities.
But a recent analysis of the record $43 billion budget for the fiscal year beginning July 1 outlines the extent to which Gov. J.B. Pritzker and legislators have come to rely on borrowing to sustain their spending goals.
For example, the Civic Federation’s Institute for Illinois Fiscal Sustainability noted that the new
FY 2021 budget “included repayment of $1.6 billion in borrowing to cover revenue shortfalls” for the current fiscal year that ends June 30.
More disquieting financial news came Tuesday when Illinois became the first state to borrow from a new Federal Reserve lending program — Municipal Liquidity Facility — after it was unable to reach a similar agreement with its traditional lenders in the bond market.
The state originally attempted in May to sell $1.2 billion in bonds in the private market. But the state’s finances are so poor that private lenders sought higher interest rates as protection against perceived risk than state officials wished to pay. Instead, Illinois will pay a rate of 3.83 percent to the Federal Reserve for the MLF loan.
The federation analysis stated that “because Illinois has the lowest credit rating of any state, it would pay a relatively high interest rate on the loans — but not as high as the rates currently demanded by ... the bond market.”
The Fed is reluctant to make loans of that nature, its rules requiring that borrowers, like Illinois, must provide “evidence that participants in the MLF are unable to secure adequate credit accommodations from other banking institutions.”
The coronavirus pandemic and the economic lockdown Pritzker ordered in March to try to limit its spread knocked state revenues — primarily state and corporate income taxes and sales taxes — for a loop. They exacerbated the current FY 2020 budget’s woes and are expected to eviscerate anticipated revenues for FY 2021.
As a consequence, the FY 2021 budget depends on “$5 billion in borrowing through the MLF and about $1.2 billion in other debt,” the federation’s analysis stated.
Pritzker has indicated he would prefer to avoid borrowing from the MLF, but that desire is predicated on his hope that Congress will provide sufficient money in grants to make the borrowing unnecessary.
In other words, he’s hoping for a federal bailout to avoid federal borrowing, an optimist’s dilemma.
But Pritzker is not rolling the dice in another respect.
He’s pushing for voters to approve a progressive-income-tax amendment to the Illinois Constitution in the November election. If approved, the measure would repeal the current flat-tax mandate and allow Pritzker and legislators to establish a variety of tax rates for varying levels of income.
The measure requires a supermajority of 60 percent approval to become law, a significant hurdle. Perhaps that’s why Pritzker, who estimates his progressive tax would generate nearly $1.2 billion for the
FY 2021 year, is not counting on the money.
Assuming the measure does pass and the state’s revenue estimates are correct, it would provide a windfall of sorts that would reduce the budget deficit.
The state is also borrowing money so that it can reduce its backlog of unpaid bills. Borrowed money and unpaid bills both reflect debt. But interest rates on money borrowed in the private market — called “backlog bonds” — to pay unpaid bills are less than the interest rate the state pays — 1 percent a month — on unpaid bills submitted by state vendors.
“The state previously sold $6 billion of backlog bonds accumulated during the two-year budget impasse. Last year, the legislature authorized the sale of an additional
$1.2 billion in backlog bonds to further reduce the amount of unpaid bills, which currently stands at
$6.9 billion,” the federation study reported.
On top of that borrowing, the legislature increased permitted borrowing from $1.2 billion to $1.5 billion “from other state accounts” to support the general fund budget.
Many state accounts hold funds that are re-
quired by law to be devoted to specific purposes rather than for general fund spending. It’s those accounts from which the state is borrowing, supposedly under the legal requirement of paying the money back in 48 months.
State payments to Illinois’ five public-pension funds demonstrate how far the state is behind the financial eight ball. The FY 2021 budget includes $8.6 billion in pension contributions, an increase of $511 million over the current year.
Unfortunately, the “statutorily required” payments are less than the “actuarially required” payments, meaning the level of underfunding — what’s available to pay what’s owed — will increase from the state-estimated level of roughly $140 billion.