Illinois top Dems pushing Treasury Secretary Janet Yellen to allow new COVID funds to pay ‘unique’ debt

WASHINGTON — When the COVID-19 pandemic hit, Illinois became the only state to take advantage of a new federal program to borrow money from the Federal Reserve.

After taking on $3.8 billion in short-term borrowings last year, top Illinois Democrats were shocked to learn that proposed rules covering the use of new federal COVID relief funds, released on Monday, ban the state from using the money to pay down that debt.

The Illinois Democrats are making a unified drive to pressure fellow Democrats in the Biden administration to revise what they see as overly restrictive rules to carve out a narrow exception for the $3.8 billion borrowed under the Municipal Liquidity Facility fund.

The Treasury Department on Monday issued interim rules for how states and other local governments can use recovery funds approved as part of the American Rescue Plan Act of 2021.

Almost every local government in Illinois will get money — cities, villages, counties and the state. There is a $8.1 billion allocation for the state of Illinois, part of $350 billion across the nation in emergency funding.

The first money will flow to local governments this month with the rest sent about 12 months later.

And though the Biden White House claimed the rules surrounding the disbursement of the funds allow “substantial flexibility for each jurisdiction to meet local needs,” Illinois falls into a special category of one when it comes to paying down the $3.8 billion debt.

The proposed rule issued on Monday said this new federal relief money could not be used to pay “interest or principal on outstanding debt instruments, including, for example, short-term revenue or tax anticipation notes, or other debt service costs.”

The funds also cannot be used to make a deposit in any pension fund or cut taxes directly or indirectly. That’s a big deal to Republicans — nationally and in Illinois — who feared the money would be use to plug budget holes caused by what they argue is Democratic mismanagement and out-of-control pensions prior to the pandemic.

As the COVID pandemic spread and the economy collapsed, in April 2020, the Federal Reserve announced the creation of Municipal Liquidity Facility funds. Illinois was the first and only government to tap into it.

Comptroller Susana Mendoza, in a Wednesday letter to Treasury Secretary Janet Yellen, said, “These debts would not have been incurred except as a response to the COVID-19 pandemic.”

All the state spending was “directly related to the COVID-19 crisis,” the Mendoza letter to Yellen said. Between April and December 2020, the waves of borrowing were to cover PPE supplies and equipment plus payments to Illinois Medicaid providers.

On Wednesday, Mendoza, Sen. Dick Durbin and Rep. Raja Krishnamoorthi huddled to map strategy.

On Thursday, Durbin led a letter from most of the Democrats in the Illinois congressional delegation to Yellen, making the point the Federal Reserve created that fund to “help state and local governments manage cash flow pressures caused by the pandemic.”

Gov. J.B. Pritzker “and his administration have been in frequent contact with the Treasury Department” to overturn the ban, deputy chief of staff Emily Bittner told the Chicago Sun-Times on Thursday.

The White House should not be surprised at the Illinois pushback. Mendoza and Pritzker have been saying for months Illinois would use a chunk of the $8 billion to repay the debt from the Federal Reserve loan.

They are all asking the Biden White House and Treasury Department to recognize the special Illinois circumstances concerning this one specific debt offering and not apply fiscal handcuffs.

“If anyone’s worried this money will go toward pensions they can stop worrying. I have been crystal-clear that Illinois will not use this money to pay off legacy debts like pensions,” Mendoza told the Sun-Times.

Said Mendoza, “This should be an easy fix given Illinois’ unique circumstance of being the only state to use short-term borrowing from the Federal Reserve to pay our medical bills to get us through the pandemic. We want to pay the federal taxpayers their money back.”

DIFFERENT ISSUE FROM CHICAGO

Chicago is in line for almost $1.9 billion in the new federal money, and Mayor Lori Lightfoot is concerned about the proposed rule banning the money to pay down debt because she had been counting on the cash.

She planned to use about half of it to pay off $465 million in loans that was part of a financial maneuver — nicknamed “scoop and toss” — the cash-strapped city used to kick the fiscal can down the road by taking on new debt to pay off old debt.