Tuesday, April 12, 2016

Double Down: A Sinking State

Think of it as a gift to Merrill Lynch...
Double Down: A Sinking State

My banker called the other day and suggested that I move my meager savings out of long-term bonds and into something providing a bit more in returns. 

“Are you suggesting something with a bit more risk?” I responded like the old man I’ve worked hard to become.

“Well, yes,” she breathed with that subtle exasperation that comes with a financial advisor’s license.  “But long-term bond returns are dismal and projected likely to generate almost flat line benefits in the next few years.”

“Really,” I answered.  Like I comprehended string theory.

Then she added with a chuckle, “Of course if you want to jump in to secure the $480 million just issued in General Obligation Bonds for the State of Illinois, you’ll get a much better return seeing how the budget impasse has elevated the returns for a savvy investor.”

“Wait, wait,” I shot back.  “You mean with no budget our state is borrowing to make payments for services we should have already budgeted for?”

“Of course,” she smiled.  “With bonds returns falling so low, this would be the best time for a state with such a lousy credit rating to offer a general obligation bond purchase.  That’s why you’re not a financial advisor, my friend.  And the governor’s budget impasse has mantled Illinois with ‘the lowest credit ratings and the widest so-called credit spread among the fifty states.’”

 I summoned my entire financial prowess: “So, it’s good, maybe, right?”

“Of course not.  It’s Illinois, silly.  Illinois will pay more than other states who might be taking advantage of the same precipitous fall in bond returns.  But we have a budget impasse. That’s why Illinois has been holding back on issuing bonds for so long – about two years, I believe.  When the ratings companies cut your credit rating you have to pay more for yield premiums in order to attract investors.”

“So the state pays more to borrow?”

“Good!  Now you’re beginning to catch up.  And that means you and all of us taxpayers pay more because the ratings continue to fall as we march on through this treacle called the budget impasse.  Ten months and counting.  In fact, Bloomberg suggested that for every $1 billion borrowed by Illinois, we’d all pay an extra $175 million over the 25 years for investor returns.”  

“So, Rauner’s austerity and conservative compassion…?”

“Yep.  It’s punitively expensive, and it will be for a very long time.  Not just for the regulars like you who are lucky enough to have an income, but even more for those without.  This guy wins over Madigan or he is taking no prisoners…of course the investment companies do very nicely.”

“But how can we go on like this?”

“Another good question.  Now I feel the empowerment you teachers all love to talk about.  If this is a teachable moment, why not go to the Curious City segment on WBEZ presented by Dan Weissmann trying to sort out where the money goes if there is no state budget, if there is no money.

You can read the transcript or listen to the podcast: either way it’s probably scarier than any Edgar Allen Poe story you taught.”

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