Big Banks Are Getting Big Bucks During Illinois Budget Crisis
By aaroncynic in News on Jan 19, 2016 9:26PM
Photo Credit: Rotating Frame
Thanks to interest rate swap deals that went south during the market collapse of 2008, Illinois will have paid out nearly $618 million by the end of FY15, and could end up paying out more than $1.45 billion total in the future. In addition, if the budget impasse continues and its credit rating drops further, the state could end up doling out an additional $124 million in penalties if termination clauses are triggered.
As a result of the market crash in 2008, net payments on interest rate swap deals sold to the state increased, and interest rates will more than likely never rise high enough for the state to break even on the deal. Additionally, the report says that the swaps added an additional layer of risk as well as add-on costs, which cost taxpayers more than traditional fixed-rate bonds.
“This report shows that these toxic swaps have been an unmitigated disaster for the state, failing in almost every way,” said Saqib Bhatti, Director of the Refund America Project and one of the co-authors of the report, in a press release. “If state officials knew then what we know now, it would have been financially irresponsible for them to have signed these deals.”
The report accuses big banks who sold the state the swaps of misrepresenting the risks, which would likely violate Illinois state law as well as a federal “fair dealing” rule that prohibits financial entities from “unfair or deceptive” practices. It calls on Gov. Bruce Rauner and other Illinois lawmakers to both petition the Securities and Exchange Commission for enforcement action and to sue the banks.
Currently, the state pays about $6 million a month to pay for these interest rate swaps. Authors of the report say that while the state continues to cut checks for the banks, social services are suffering, particularly because of the budget impasse. Rauner has been at an impasse on passing a budget with state lawmakers as an attempt to leverage his “Turnaround Agenda,” which critics say would severely harm labor interests and social services. Many agencies that provide social services for vulnerable populations like the homeless, senior citizens and people with disabilities have had to make serious cuts to programming and staff due to a lapse in state funding.
Coauthor of the report Carrie Sloan said:
“That Illinois continues to pay the banks for these swap deals at a time when there is no state budget - and many vital social services are missing their funding - raises real questions about the state’s moral priorities.”
Rauner’s office brushed off the blame, and said it was looking into the matter. In a statement provided to Chicagoist, Rauner’s Press Secretary Catherine Kelly said:
“Governor Rauner inherited these swaps from Governor Blagojevich. The Governor’s Office of Management and Budget is doing an in-depth analysis of these swaps in order to reduce the State’s payments and minimize its financial exposure.”
If Rauner or state lawmakers were to take action and petition the SEC, it could investigate and prosecute the banks, potentially getting back the money and recapping its losses. In tandem, it could sue them, and ask for an injunction on current payments, alleviating Illinois of its $6 million monthly bill during legal proceedings.