http://www.chicagobusiness.

com/article/20160711/NEWS02/160719986/the-state-is-payingbanks-why-not-nonprofits

July 11, 2016

The state is paying banks. Why

not nonprofits?
By LISA BERTAGNOLI
Each month, Illinois writes a check totaling $1.5 million to nine banks. Because of the budget
situation, the state lacks authorization to write the checks, a local watchdog group maintains. Yet it
does. In fiscal 2016, those checks totaled $28 million.
The state also lacks authorization, also because of the budget situation, to pay what it owes
nonprofits. That is why 99 nonprofits, under the umbrella coalition Pay Now Illinois, are suing the
state for more than $130 million in unpaid contracts.
Why is the state paying banks without authorization, but not nonprofits and other groups?
The $28 million is $14 million in credit-enhancement and $14 million in remarketing fees that are
related to just five of the state's 19 outstanding hedging interest-rate swaps. Those five swaps were
made in 2003, when Rod Blagojevich was governor, by the Governor's Office of Management and
Budget. Illinois' lack of a budget meant there was no authorization to make those payments,
according to ReFund America Project, a Chicago-based group that focuses on correcting what it
says is an imbalance between Wall Street interests and municipalities.
Authorization to pay interest, yes. Fees, no. The state is choosing to make those (fee) payments,
says Saqib Bhatti, fellow at Roosevelt Institute and director of ReFund America Project. The project
has also examined swap deals in Wisconsin, California and Puerto Rico. If service providers can't
be paid without a budget, then neither can these fees, Bhatti says.
A ReFund America analysis shows that the 19 swaps in total, made out of four offices more than a
decade ago, cost Illinois $5.8 million a month in interest payments. Through fiscal 2015, Illinois paid
$618 in net payments on the swaps; through 2033, it will pay another $832 million.
"These swaps represent yet another example of the significant fiscal problems Governor Rauner
inherited, the governor's office wrote in response to request for comment. The failed swap
agreements negotiated by the Blagojevich Administration now pose financial risk to Illinois
taxpayers, and have limited our ability to pay for education and social services, the statement said.

Payments on the swaps are a continuing appropriation, and do not require passing a budget yearly
to authorize payment, a spokeswoman for the governor's office added in a note. She likened it to the
way legislators are paid, despite the lack of a budget.
Much has been written about Chicago Public Schools' swaps, as well as the city of Chicago's. In
2015, Chicago Mayor Rahm Emanuel closed two such swaps, paying $200 million in termination
fees.
The state could do the same, though it's not a smart move and probably not a legal one, given lack
of a budget, says Bhatti. Too, paying termination fees voluntarily means you are realizing all future
losses on deals, he says. Instead of eliminating risk, you are realizing it.
The state could also sue the banks involved for misrepresenting the swaps, says Bhatti, who on
June 29 gave a presentation on the swaps on to Forefront, a Chicago-based nonprofit that
represents funders and nonprofits.
That the state is paying some bills without authorization, but not others "isn't fair, but it's not
surprising, says Nora Collins-Mandeville, policy director at Illinois Collaboration on Youth, a member
of Pay Now Illinois. It is also surprising, she says, that the state is paying interest rates on the bonds,
because the many providers to which the state owes payments will not receive interest on those late
payments.
It's interesting to see all this money bonded out, and the state paying interest, but our programs
don't get paid interest, Collins-Mandeville says. Somehow that's viewed as acceptable.
Swaps are a type of derivative that popular in the late 1990s and early 2000s, but which fell out of
favor after the recession. In a swap, a bank says it will pay a variable interest rate on bonds in
exchange for a municipality paying a fixed rate. The bank pays the variable rate to bondholders; the
municipality pays the fixed rate to the bank. The swaps are meant to protect municipalities against
rising interest rates.
After the crash of 2008, interest rates plummeted, to almost zero percent. Banks' interest rates
plummeted accordingly, while Illinois was left paying a 5 percent fixed rate.
Bhatti says banks misrepresented the swaps by structuring them as 30- to 40-year deals, and not
telling municipalities that, due to risk, corporations rarely lock themselves into swaps for more than
five or seven years. They marketed the swaps as the same product major corporations are using,
but left out that key distinction, Bhatti says.
Given the volatility of interest rates, banks should have presented the swaps as a gamble, not as
protection against risk, he adds.
Illinois holds 19 such swaps, with Bank of America, Loop Financial, Goldman Sachs, JPMorgan
Chase, Citigroup, Bank of New York Mellon, Deutsche Bank, Morgan Stanley, Wells Fargo, and AIG,
according to ReFund America research. The four agencies involved in the swaps are the Governor's

Office of Management and Budget, University of Illinois, Illinois State Toll Highway Authority and
Illinois Housing Development Authority.
Meanwhile, a hearing on the Pay Now Illinois' motion for a preliminary injunction seeking immediate
payment has been moved to 10 a.m. from 2:30 p.m. on July 13. The state is expected to ask for a
two-week extension in order to analyze the impact of the stopgap budget, says Andrea Durbin, chair
of Pay Now Illinois and CEO of Illinois Collaboration on Youth.
Durbin says that Pay Now Illinois will not drop its preliminary injunction to force payment. We still
haven't been paid, she says. There's still a great deal of uncertainty. The stopgap budget isn't a
final solution.
The coalition would have 100 members, except that one, Pediatric AIDS Chicago Prevention
Initiative, was paid in late May. The state found federal dollars with which to honor that provider's
contract, Durbin says.