In early June, the State of Illinois obtained a $1.2 billion loan directly from an extraordinary Federal Reserve lending facility. The Fed asserted the loan was authorized under Section 13(3) of the Federal Reserve Act, which is titled “Discounts for individuals, partnerships, and corporations.” These emergency provisions make direct Federal Reserve credit available to a wide variety of parties that normally don’t have access to the Fed’s discount window, under “unusual and exigent circumstances.”
One question arises whether a sovereign state qualifies as an “individual, partnership, or corporation,” for the purpose of qualifying for a massive loan like this. Another question arises due to other provisions in law and regulation that deny 13(3) loan eligibility to “insolvent” borrowers. Those provisions include a requirement that the CEO or other authorized officer certify that the borrower is not insolvent. Under Federal Reserve regulations, the entity is “insolvent” if the “person or entity is generally not paying its undisputed debts as they become due during the 90 days preceding the date of borrowing under the program or facility.”
Illinois has had a bill backlog in the billions of dollars in recent years. And from May 1, 2020 to June 5, the date the Fed loan closed, the backlog exceeded $6 billion. Then, over the next week, after the loan was secured, the bill backlog fell about $2 billion -- after the arrival of the proceeds of a loan that appears to be against law and regulation in light of the bill backlog.
Today, I received a formal certification letter from the State of Illinois in response to a FOIA request. The letter is titled “Certification Regarding Solvency and Adequate Credit,” and is signed by JB Pritzker, Governor of Illinois. Pritzker certified that “the Issuer is not insolvent,” with a footnoted reference that reads as follows:
For the purposes of this certification, a person or entity is “insolvent” if it is in bankruptcy or any other Federal or State insolvency proceeding (as defined in paragraph B(ii) of Section 13(3) of the Act), or if the person or entity was generally failing to pay undisputed debts as they become due during the 90 days preceding the date of borrowing under the Facility.
I’ve received a response to another FOIA request to the State of Illinois recently. I requested a list of all the payments the State of Illinois made from June 4 to June 11, the period when the bill backlog fell by more than $2 billion, but still totaled $4.8 billion as of June 12. I now have a spreadsheet with more than 15,000 individual payments made by the State of Illinois in that week, totaling more than $2 billion. The payments data includes the “voucher date,” the “payment date,” the identity of the recipient, and the amount of the payment.
Analysis of those 15,000 payments is underway. So far, I haven’t seen direct evidence of payments to specialized firms involved in “factoring” late payments. But the payments could be made to parties who then remit money to the factoring firms, after those firms fronted the money to the party awaiting payment from Illinois. Some of these factoring firms have reportedly been under scrutiny.