Interest rate swaps were the focus of a state hearing held in Chicago Wednesday morning. Advocates urged lawmakers to take legal action against these "toxic" bank deals.
Advocates who say "toxic" interest rate swaps are squeezing Illinois' budget spoke out about the financial deals Wednesday morning during a state hearing on the topic.
The Illinois House Revenue and Finance Committee held the subject matter hearing. Testimony was gathered from social service providers as well as municipal and state finance experts, including former U.S. Rep. Brad Miller (D-NC), an attorney who has focused on interest rate swaps.
The expert panel was aligned with the Grassroots Collaborative, which has worked for years to shed light on interest rate swaps, namely those used by the city of Chicago and the Chicago Public Schools district.
Since July 1, the start of the Illinois budget impasse, the state has paid over $67 million to banks for interest rate swap agreements, according to panel expert Saqib Bhatti with the Roosevelt Institute's ReFund America Project. The bank payments have kept flowing as many state services and programs have gone unfunded during the monthslong budget stalemate. (Here's a full breakdown of how interest rate swaps work and why they are costing the state, city of Chicago and CPS millions of dollars annually).
"There is one group that has been paid in full, on time every month -- the banks," Bhatti said before testifying at the hearing. "The social safety net protects the bankers, but not Illinois' most vulnerable citizens."
Bhatti urged the Illinois General Assembly "to put the needs of Illinois residents ahead of Wall Street greed" and "take legal action to recover losses" from the swaps, which date as far back as 1998.
Miller said numerous municipalities and public entities are struggling financially due, in part, to these bank deals.
"The more you understand it, the more you realize this should not have happened," Miller said before the hearing. "And if the borrowers, the finance people, had really understood all of this stuff, there's no way they would have" entered into these agreements.
During a back and forth with state Rep. Ron Sandack (R-Downers Grove), panelists clarified that interest rate swaps are also available in the private market.
"What I think you're pitching us is, is this is a market to which public sectors should not be involved in," Sandack said of interest rate swaps. "It's just either above our pay grade or too tricky, et cetera, because the bad guys are taking advantage of government."
In response, panelists said the banks failed to share information on "how to offset the risks" of the deals, among other problems with the agreements. Bhatti said some financial instruments, including interest rate swaps, are simply too risky to be used in the public sector.
State of Illinois representatives did not speak at the hearing. Committee members said they would like to hold another hearing on interest rate swaps to get the perspective of state, city of Chicago and CPS officials.
"I'd like to know what their reaction is," House Majority Leader Barbara Flynn Currie told Progress Illinois after the hearing. "Do they believe they really did have the competence [to enter into these deals]? Did they think that they really were hoodwinked? Do they think that maybe there's an opportunity to go to a court of law and say, wait a minute, we have been somehow (misled) by the financial industry?"
Currie said she would like state officials to weigh in on whether Illinois could try to recoup losses from the swap deals.
"Do they think that they have a case? And if not, why not?" she said.
Although Wednesday's hearing was subject matter only, Bhatti described the day as significant.
"It's the first time we're actually seeing action on this taken at the state level to really look into these deals," he said. "The fact is there's been lots of organizations all across Chicago and Illinois that have been talking about the effect of these toxic interest rate swaps over the course of the last several years. So far, we've seen a blind eye turned toward us by the school board, by the city council, but what's great is we're actually seeing the legislature take this up ... We have a real chance here to take back money that's been taken away from us in the state and really reset our priorities."
The state has already paid $618 million to banks for the swap deals through the end of the 2015 fiscal year, and it "is expected to pay $832 million over the remaining life of these deals, from fiscal year 2016 through 2033," according to ReFund America Project's research. By 2033, the deals could cost Illinois taxpayers a total of $1.45 billion.
Illinois Gov. Bruce Rauner's office did not immediately return a request for comment. Rauner spokeswoman Catherine Kelly has previously told Progress Illinois that 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."
Immediately after the hearing, lawmakers on the House human services appropriations committee heard testimony about the state budget.
Outside the Michael A. Bilandic Building, where the hearing was held, members of the Illinois Partners for Human Service coalition rallied for a state budget solution.
They marched in a circle chanting, "No budget, no peace!" Some carried signs that read, "Choose revenue" and "Stop the train wreck." The protesters want lawmakers to enact a "responsible" state budget that fully funds human services.
"The fact that Illinois continues to go without an FY 16 budget has put the human services sector in a really, really bad situation," Adam Ballard with the disability rights group Access Living said at the protest. "We're starting to lose agencies. Smaller agencies, larger agencies are having to lay off workers. And people with disabilities, people who need services, are not getting the services they need, because we're allowing the safety net to be shredded by this ongoing hostage situation with the budget."