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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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