(The Center Square) – As Illinois lawmakers worked on a budget in May for the fiscal year that begins July 1, the state was already facing an estimated $7 billion revenue shortfall largely due to the COVID-19 pandemic.
Adam Levin, from Pew Charitable Trusts, said Illinois is hoping to borrow billions from the Federal Reserve’s new Municipal Liquidity Facility, or MLF, which was created as a result of the pandemic. The program will buy notes directly from all 50 states, counties exceeding 500,000 residents and cities with more than 250,000 people.
“The Fed stepped in and said states might need to issue debt to cover some of the revenue losses that they are experiencing now but interest rates have gone up so it is very expensive for them to do that so they created the program,” Levin said.
Levin said states generally have two options for borrowing money: Long-term bonds to finance infrastructure projects, which can be repaid over years or decades. Long-term bonds account for the vast majority of municipal debt. The other option is short-term notes.
“Short-term borrowing is used for covering cash flow that governments need throughout the year because revenue comes in at certain set points of the year but they need money consistently throughout the calendar to pay for their expenditures,” Levin said.
But short-term notes are not a budget solution and require sufficient future revenue to borrow against.
Levin said balancing state budgets will require long-term solutions such as spending cuts, tax increases, or dipping into rainy day funds. Illinois can’t dip into its rainy day fund because the fund is nearly empty.
Levin said there is not a state in the country that will be immune to the obstacles that lie ahead.
“All states are facing pretty unprecedented revenue crashes right now, so a lot of states are thinking about all the tools that they have available to address these issues,” he said.
