Illinois Becomes First State to Tap Federal Reserve Liquidity Relief Under CARES Act - Should More States & Cities Use It?

What’s the story?

• Illinois on Friday became the first state to use the Federal Reserve’s Municipal Liquidity Facility, which enables states, counties, and cities to issue securities (e.g. bonds) that are purchased by the Federal Reserve to give the borrowing jurisdiction more funding to address budget shortfalls caused by the coronavirus (COVID-19) pandemic.
• The Municipal Liquidity Facility (MLF) was created by the Coronavirus Aid, Recovery, and Economic Security (CARES) Act and went live on May 26th. It can purchase up to $500 billion in debt securities because the CARES Act provided the Fed with $35 billion to leverage for making those purchases.
• Illinois is deep in debt and faces a $138 billion unfunded public employee pension liability, which is the largest in the country, so the declines in tax revenue brought on by lockdowns to slow the spread of COVID-19 have made its budget crisis even more severe. 
• That pattern has played out in many other states, particularly with respect to unemployment benefits, prompting calls for additional bailouts beyond the $150 billion provided by the CARES Act & the $11 billion in funding from the “phase 3.5” coronavirus relief bill to states for addressing pandemic-related expenses. Utilization of the MLF by other governmental entities in need may make additional federal grants to less necessary.
• Illinois issued $1.2 billion in general obligation bonds to the MLF at a one year interest rate of 3.83%. The interest rate is based on Illinois’ credit ratings, which at BBB- & Baa3 are the worst of all 50 states and one notch above “junk bond” status.

What is the Municipal Liquidity Facility?

• The Municipal Liquidity Facility (MLF) is one of the Federal Reserve lending facilities created by the CARES Act, and is designed to give states, counties, and cities access to capital that would be used to close budget shortfalls created by the COVID-19 pandemic.
• Eligible issuers include states & the District of Columbia; cities that are designated as cities under the Census or have over 250,000 residents; counties that are designated as counties under the Census or have over 500,000 residents; or are multi-state entities that were created between two or more states in a compact approved by Congress.
• The governmental entity in need accesses financial support by issuing financial securities (various types of bonds or notes tied to tax revenue) that have a maximum maturity of 36 months.
• The securities have an interest rate that’s based on the maturity of the notes & the credit rating of the entity issuing the notes. The issuers must have a credit rating for general obligation bonds that’s at least BBB- or Baa3 from at least two major credit rating agencies as of April 8, 2020. Issuers that are subsequently downgraded must be rated at least BB- or Ba3 at the time of issuance. 

— Eric Revell

(Photo Credit: iStock.com / Diy13)