U.S. blue states build debt stockpiles as virus aid is stymied

October 1, 2020

By Karen Pierog

CHICAGO (Reuters) – A trio of Democrat-run U.S. states could go deeper into debt with billions of dollars in new issuance to plug holes in their coronavirus-hit budgets, if a new round of federal aid fails to materialize this year.

With revenue dropping due to the fallout from the pandemic, New York already sold $4.5 billion of short-term notes out of an $8 billion authorization, while New Jersey gave final approval this week to $4.5 billion of debt, and Illinois lawmakers earlier this year agreed to issue up to $5 billion of bonds.

No other states have turned to major borrowing to help deal with the current revenue crisis, according to credit rating analysts.

Whether and how much the three states borrow relies largely on if Congress and the White House agree on another stimulus package that includes funding to replace their lost revenue. U.S. House of Representatives Speaker Nancy Pelosi said on Thursday the sides were “far apart” on state and local government aid.

Some congressional Republicans have been reluctant to bail out blue states, particularly those with pre-pandemic fiscal problems.

Carol Spain, a S&P Global Ratings analyst, said Illinois’ borrowing will depend on federal aid and other factors including revenue performance. S&P recently said the state, which is rated a notch above junk, could look more like a non-investment-grade issuer due in part to its borrowing needs.

Illinois will only borrow “if needed,” according to a state budget office spokeswoman, who declined to elaborate.

Passage on Nov. 3 of a constitutional amendment to tax high-income residents more would give Illinois a revenue boost. Meanwhile, state agencies have been directed to identify 5% spending cuts this fiscal year and 10% in fiscal 2022.

In New Jersey, which increased its “millionaires’ tax”, officials hope to not tap the full $4.5 billion.

“We’re hopeful that the revenue figures will be strong, that assistance from Washington will come and allow us to minimize the amount of money we borrow,” New Jersey Assembly Speaker Craig Coughlin said on Monday.

Illinois and New Jersey, which have negative outlooks on all of their credit ratings, opted for deficit borrowing as neither had reserves to weather the pandemic or cut spending enough to balance their budgets, according to Howard Cure, director of municipal bond research at Evercore Wealth Management.

“Borrowing long-term for operating is a cardinal sin of budgeting,” he said.

The two states face a Dec. 31 deadline to borrow through the U.S. Federal Reserve’s municipal liquidity facility (MLF), which Illinois already tapped for a one-year, $1.2 billion loan in June.

There has been a push to extend the deadline, lower borrowing rates and lengthen loan maturities beyond a three-year maximum. Illinois can issue bonds due in up to 10 years.

In addition to MLF loans, New Jersey can also sell 12-year bonds in the U.S. municipal market.

New York’s borrowing plan addresses a cash crunch caused in part by a delay in the income tax filing deadline to July from April. Freeman Klopott, spokesman for the state’s budget division, said no additional note sale is planned before the authority to issue them expires Dec. 31.

Douglas Offerman, a Fitch Ratings analyst, said federal inaction by year end would leave New York with just a quarter of its fiscal year, which ends March 31, to deal with budget problems.

“The remaining authorized amounts give the state some additional flexibility in the event that no consensus emerges in Washington on a new federal aid package,” he said, referring to the notes and an untapped $3 billion line of credit.

(Reporting By Karen Pierog; Editing by Alden Bentley and Alistair Bell)