U.S. Treasury’s COVID debt rule is a bleak situation for Illinois

The following is an update from the piece How Federal Stimulus Money will be Allocated in Illinois, which was published March 15 and another piece published on April 17.

A major wrench was thrown at the state earlier this month when the federal government announced that American Rescue Plan (ARP) money cannot be used to pay off debt incurred by states during the COVID pandemic.

State officials already new that such money could not be used to pay down pre-COVID debt, such as outstanding pension obligations. However, they operated under the assumption that they would use a large chunk to apply to pandemic-related debt (again, see post from April 17).

This prompted State Comptroller Susana Mendoza to issue a letter to Secretary of the Treasury Janet Yellen requesting that the federal government reconsider. At the heart of the state’s argument was that the debt the state was planning to paid off was directly related to the pandemic. After all, the debt accumulated was from borrowing from the Federal Reserve Liquidity Fund, which was set up primarily to help states and local governments during the pandemic. If the pandemic never happened, the state wouldn’t need to borrow to meet services.

While there is a optimism that the Treasury may overturn its ruling, the situation is time sensitive because the General Assembly need to pass Gov. Pritzker’s Fiscal Year Budget by June 30. Right now, the General Assembly is moving forward under current rules, meaning they will need to budget for the extra $2 billion originally planned to be paid off.

The good news is that the Illinois Commission on Government Forecasting and Accountability (CGFA) and the Governor’s Office of Management and Budget revisited their calculations and found about $1.5 billion to $2 billion in new revenue to help fill that gap. If you think that sounds odd, it pretty much is. We recommend you give Rich Miller’s column a read.

Prairie State Policy will continue to publish updates moving forward.

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