Illinois pockets $2 billion Fed Municipal Liquidity Facility loan

Illinois closed Thursday on its $2 billion borrowing from the Federal Reserve’s Municipal Liquidity Facility using the cash to pay down its growing bill backlog.

“The treasurer received the funds early this morning,” Carol Knowles, spokeswoman for the Governor’s Office of Management and Budget, said in an email.

The Marriner S. Eccles Federal Reserve building stands in Washington, D.C., U.S., on Tuesday, Jan. 27, 2015. The Federal Reserve Board joins with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation in pushing for higher capital requirements for large banks.
The Federal Reserve's $2 billion loan to Illinois through its Municipal Liquidity Facility has closed.
Bloomberg News

Comptroller Susana Mendoza is using the infusion of proceeds to pay down the state’s bill backlog reducing it to $6.99 billion Friday from $8.9 billion Friday. The office will direct much of the money to overdue Medicaid payments. That will allow the state to leverage an additional $1 billion in federal matching dollars.

Gov. J.B. Pritzker turned to deficit borrowing to help manage through the COVID-19 pandemic’s tax blows in the absence of federal relief that would make up for lost revenues. Pritzker attributes about half of the current $4 billion hole to the pandemic and half to structural strains.

The Democratic governor had been banking on scrapping the current flat income tax for a progressive rate structure to generate at least $3 billion more in annual revenue but voters rejected a constitutional amendment question on the November ballot. He announced $711 million of cuts this week and is seeking legislative input on how to address the remainder of the gap.

The MLF loan is backed by a state general obligation pledge with a three-year term, the maximum under the program. The notes will have a borrowing rate of 3.42%. Pritzker had previously set the borrowing level at $2 billion although the legislature authorized up to $5 billion in the fiscal 2021 budget.

The state already borrowed $1.2 billion to deal with a $2.7 billion fiscal 2020 pandemic hole and will repay the first borrowing by June 30.

The rate is based on MLF pricing that uses a fixed interest rate based on a comparable maturity overnight index swap rate plus a spread based on a borrower’s ratings. Illinois’ spread based on its ratings that are one notch above junk is 3.30%. The program expires at the end of the month.

The state’s three-year bond was at 1.99%, a 183 basis point spread to the Municipal Market Data’s AAA benchmark earlier this week when terms were set and by Thursday had narrowed to 1.94%, a 178 basis point spread so the 3.42% represents a steep penalty.

Despite the high rate, market participants have said the state's decision to use the MLF was a smart move given its market rates fluctuate and its access alone could contribute to improved overall trading levels.

The state’s spreads have zig-zagged throughout the pandemic depending on negative headlines over its deficits, threats to its investment grade rating, planned borrowings, and the market’s appetite for higher-yielding paper.

The state will use any potential federal relief and revenue growth to repay the MLF loan. Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings all assign a negative outlook.

Illinois was the first eligible borrower to take advantage of the $500 billion short-term lending program in early June when it sold $1.2 billion of one-year certificates to help cover a $2.7 billion fiscal 2020 revenue shortfall. The state paid an interest rate of 3.82% on the June certificates. The Federal Reserve has since lowered the spread by 50 basis points.

New York’s Metropolitan Transportation Authority is the only other borrower. Market participants credit the program with helping to stabilize the market after a tumultuous March. The MTA last week borrowed its remaining $2.9 billion of authority with the issuance of payroll mobility tax bond-anticipation notes with a 1.33% coupon for those maturing in 2023.

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