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*** UPDATED x3 *** Treasury Department won’t let states and locals use ARP money to pay off debt

Wednesday, May 12, 2021

* Gov. Pritzker was asked how the state would use some of the American Rescue Plan money...

“The debts that we racked up during the COVID year of 2020, we had to do some federal borrowing in order to cover our bills,” Pritzker said. “We also racked up a bunch of bills, a bill backlog, that needs to be paid back. We need to act responsibly with these dollars.”

Among other things, Illinois owes the Federal Reserve about $3.6 billion from last year. The expectation was that the state could use what now looks like $8 billion to pay that off.

* From the US Treasury Department’s “interim final rule” on the state and local use of American Rescue Plan funds

Question 17: In the Interim Final Rule, paying interest or principal on government debt is not considered provision of a government service. Discuss the advantages and disadvantages of this approach, including circumstances in which paying interest or principal on government debt could be considered provision of a government service. […]

Sections 602(c)(1)(C) and 603(c)(1)(C) of the Act provide recipients with broad latitude to use the Fiscal Recovery Funds for the provision of government services. Government services can include, but are not limited to, maintenance or pay-go funded building of infrastructure, including roads; modernization of cybersecurity, including hardware, software, and protection of critical infrastructure; health services; environmental remediation; school or educational services; and the provision of police, fire, and other public safety services.

However, expenses associated with obligations under instruments evidencing financial indebtedness for borrowed money would not be considered the provision of government services, as these financing expenses do not directly provide services or aid to citizens. Specifically, government services would not include interest or principal on any outstanding debt instrument, including, for example, short-term revenue or tax anticipation notes, or fees or issuance costs associated with the issuance of new debt.

Uh-oh.

* Back to Center Square

The Illinois Comptroller’s office said they continue to review the interim guidance for what’s allowed and plan to provide comment.

“[Governor’s Office of Management and Budget] and our office will be seeking to clarify with the Treasury that guidance against using these funds to pay debts unrelated to COVID-19 does not prevent their use for paying debts accrued for spending related to COVID expenses,” a spokesperson for Comptroller Susana Mendoza said in a statement.

That’s basically our only hope.

* As House Revenue Committee Chair Mike Zalewski implied, unless the General Assembly decides to push budget passage beyond the scheduled May 31 adjournment (or Mendoza somehow succeeds), this won’t really help the state…


*** UPDATE 1 *** Gov. Pritzker was asked about this today

The Senate president, the speaker and I have committed that we’re going to be paying back the borrowing that we took out over the last year to cover our Coronavirus expenses.

You know that the rules are still being worked on in Washington and we are in daily communication with the offices of the Treasury Department that are deciding about those rules. They put out a preliminary rule, and they know as we do, and this happened, by the way under the last administration when they had rules around the Cares Act, that there would be adjustments that would need to be made. And so we’re following that trail to make sure that we get everything done that we need to, so we can use those. Look the federal government’s sending US dollars and then telling us that we can’t then send those dollars back to the federal government to pay for the borrowing that we took out last year, clearly doesn’t make a lot of sense. And so we’ve talked to the Treasury Department about that.

*** UPDATE 2 *** Greg Hinz

Abudayyeh said the borrowed money wasn’t for old debts but to make the state whole for COVID-related spending, and therefore ought to be a justified use.

“Right now, I don’t think this is a particularly huge issue,” she said. “These are interim rules. This isn’t a panic moment.”

Msall said the state clearly “needs to get clarification.” But even if Treasury holds to its position, the state may be able to use the ARP infusion to pay for things such as aid to public grade and high schools, normal pension costs, and some capital expenditures that would easily exceed what the Fed is owed. That would free up cash to repay the Federal Reserve debt. The question is “how much fungibility” is allowed.

Illinois House Revenue Committee Chairman Mike Zalewski, who earlier had described the Treasury guidance as a “bombshell,” today was milder in his comments.

Switching money around as Msall suggested wouldn’t be easy, he said, but overall the situation is “problematic, but not insurmountable.”

*** UPDATE 3 *** Comptroller Mendoza…

Honorable Janet Yellen
Secretary of the Treasury
1500 Pennsylvania Ave. NW 
Washington, DC 20220

Re: Interim Final Rule – Question 17 Response

Dear Secretary Yellen:

Thank you for your recent release of the Interim Final Rule providing guidance on the authorized uses of the Fiscal Recovery Funds provided under the American Rescue Plan Act. As offered in the Interim Final Rule, comments are welcomed in response to specific questions presented in the Rule. As the Chief Fiscal Officer for the State of Illinois, this letter is my response to Question 17.

It is my understanding the Interim Final Rule, as worded, would not allow the State of Illinois to use its federal funds for debt payments directly related to some $3.8 billion in short-term borrowing necessary for medical payments to the Illinois healthcare industry at crucial points during the 2020 pandemic.

This short-term borrowing by the State of Illinois in 2020 includes:

    April 2020 - $200 million from other state funds allowing the state to purchase urgently needed PPE supplies and equipment;
    June 2020 - $1.2 billion in Municipal Liquidity Facility (MLF) funds from the Federal Reserve allowing payment to Illinois Medicaid providers since the state was experiencing a $3.1 billion revenue shortfall in the two months prior;
    November 2020 - $400 million from other state funds for Illinois Medicaid providers as a cash-flow bridge to the larger loan in December; and
    December 2020 - $2 billion in MLF funds from the Federal Reserve for Medicaid and other medical providers.

This borrowing was essential for the continued performance of government services during the most fiscally challenging times for the state’s cash flow during the pandemic, all directly related to the COVID-19 crisis. It was critical to get state payments out during these periods, as our Illinois healthcare industry was fighting back the adverse impact of COVID-19.

Illinois could not wait for additional federal relief funds to help mitigate the state’s response, and without this short-term borrowing, the state’s recovery would have been imperiled.

Illinois is the only state that utilized short-term borrowing in order to provide essential government services during the pandemic, allowed under prior federal Covid-19 relief programs. These debts would not have been incurred except as a response to the Covid-19 pandemic. We want to promptly repay federal taxpayers for the crucial help they provided us during the pandemic. This is entirely consistent with the spirit of the American Rescue Plan passed by Congress and signed by President Biden. My specific request is for the Department of the Treasury to clarify this Rule to accommodate this unique circumstance; allowing Fiscal Recovery Funds to be used to directly repay Covid-19-necessitated short-term borrowing.

The Covid-19 pandemic continues while the Governor and the legislature work to balance Illinois’ budget for fiscal year 2022 and beyond. The Department of the Treasury’s timely approval of this request is critical for Illinois’ path toward fiscal recovery.

Thank you for considering this important clarification.

Sincerely,

Susana A. Mendoza
Illinois State Comptroller

- Posted by Rich Miller        

19 Comments
  1. - Bothanspied - Wednesday, May 12, 21 @ 7:00 am:

    Yikes. There’s a hole in my bucket, Dear Liza.


  2. - JS Mill - Wednesday, May 12, 21 @ 8:04 am:

    This is not a problem without a solution. By simply using ARP funds to pay current bills they can then divert money to pay down the debt.


  3. - Jagdish - Wednesday, May 12, 21 @ 8:30 am:

    @JS Mill - What makes you think our politicians can be trusted to do exactly what you said? I predict the hole gets even bigger even with the shell game they are about to play.


  4. - Perrid - Wednesday, May 12, 21 @ 8:32 am:

    Not a finance guy, as I’m sure will be apparent from the rest of my comment, but if IL uses ARP money for normal government services and uses “normal” revenue to pay down the debt, since ARP is paying for other stuff, how would that violate the rule?


  5. - Oswego Willy - Wednesday, May 12, 21 @ 8:39 am:

    === I predict the hole gets even bigger===

    That federal money is going to come due… so there’s that.


  6. - JS Mill - Wednesday, May 12, 21 @ 9:16 am:

    =I predict=

    Good for you.

    I would be interested in your predictions if you can give me the powerball numbers, other than that I have better things to do.


  7. - RNUG - Wednesday, May 12, 21 @ 9:19 am:

    Money is fungible. They’ll just move it from one pocket to the other first.


  8. - Flyin' Elvis'-Utah Chapter - Wednesday, May 12, 21 @ 9:34 am:

    When in doubt, go with RNUG.

    And Illinois won’t be the only state to figure out a go-around.


  9. - Anyone Remember - Wednesday, May 12, 21 @ 9:36 am:

    Use the federal $ to provide the needed update to the IT system at DES? /s


  10. - 1st Ward - Wednesday, May 12, 21 @ 9:44 am:

    Money is fungible. The State could do a one year funding decrease in the areas Fed money is going to. The “savings” from the budget are sent to pay down the debt. There’s no true decrease in spend and the debt is still paid. i.e. the $350MM in additional school funding can come from the Feds this year and next year instead of the State.


  11. - City Zen - Wednesday, May 12, 21 @ 10:46 am:

    So we borrowed money to pay bills, but the money we borrowed to pay bills can’t be paid off by money given to us by the feds to pay bills? Seems silly.


  12. - @misterjayem - Wednesday, May 12, 21 @ 12:03 pm:

    RNUG said what I was thinking and said it better.

    – MrJM


  13. - thisjustinagain - Wednesday, May 12, 21 @ 12:05 pm:

    To City Zen at 10:46am, ref the repayment. If the Feds allow that, then they are issuing Fed money to pay back borrowed Fed money, which is even sillier.


  14. - DuPage Saint - Wednesday, May 12, 21 @ 12:07 pm:

    Let’s see, we started a lottery to pay for education then took education money in budget and spent it elsewhere, we took gas tax money for roads and spent it elsewhere and state does sweeps of money which I don’t understand and yet they cannot figure out a way to use Federal money inappropriately. They are not trying


  15. - SAP - Wednesday, May 12, 21 @ 12:13 pm:

    I sure hope RNUG’s pocket thing works. It makes a lot of sense, which may doom it.

    I really do not understand how repaying money that Illinois borrowed from the feds last year to continue providing government services is not considered providing government services now.


  16. - don the legend - Wednesday, May 12, 21 @ 12:18 pm:

    Since we owe the Feds 3.6 billion, just hold it out of the 8.0 billion. Consider the debt paid and we just receive the 4.4 billion difference.


  17. - JS Mill - Wednesday, May 12, 21 @ 12:19 pm:

    =I sure hope RNUG’s pocket thing works. =

    It is done all the time.


  18. - EssentialStateEmployeeFromChatham - Wednesday, May 12, 21 @ 12:21 pm:

    ==Money is fungible. They’ll just move it from one pocket to the other first.==

    And they will call it “creative accounting.”


  19. - Anyone Remember - Wednesday, May 12, 21 @ 11:05 pm:

    DuPage Saint

    === … state does sweeps of money which I don’t understand … .===

    That was Filan’s goal … even if it is his ghost.


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