Progress Illinois details the findings of a new report from the ReFund America Project about the financial costs associated with the state's interest rate swap agreements.
The report details the taxpayer cost of the 19 interest rate swap agreements the state of Illinois has with financial firms, including Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and others.
During a Tuesday morning press conference, leaders with Roosevelt Institute's ReFund America Project and the Grassroots Collaborative urged Gov. Bruce Rauner and state officials to take legal action against banks in an effort to recover losses from the complicated and controversial swaps. The deals, which date back as far as 1998 and "backfired in light of the 2008 financial crash," cost the state $68 million annually, or an average of about $6 million per month, according to the report.
"At a time when the state is embroiled in a dire fiscal crisis and can't pay for services for its most vulnerable residents, it is unconscionable for the governor to prioritize payments to the bankers (who) have caused our own budget crisis when they crashed the economy," said ReFund America Project Director Saqib Bhatti. "The governor has called for a 'turnaround agenda.' We hope the governor will heed our call to turn his priorities around and take on the banks."
The state has already paid $618 million to banks for the swap deals through the end of the 2015 fiscal year, and it is "is expected to pay $832 million over the remaining life of these deals, from fiscal year 2016 through 2033," according to the report. By 2033, the deals could cost Illinois taxpayers a total $1.45 billion.
But the state's swap agreements could prove to be even costlier.
"If the state's credit rating continues to tumble and it is unable to renew its credit enhancements on the 2003B bonds in November 2016, that could trigger termination clauses on the governor's swaps and force the state to pay $124 million in penalties to the banks," the report reads.
Ending the agreements early would require the state to pay $286 million upfront in termination penalties, according to the research.
"Instead of paying these fees, we're calling on Governor Rauner and state officials to sue the banks that sold us these toxic deals," Bhatti said. "This could allow the state to stop paying banks $68 million a year, recover up to $618 million in past swap payments and eliminate the threat of termination penalties as the state's financial health continues to deteriorate."
Additionally, the groups want the governor to petition the U.S. Securities and Exchange Commission "to bring an enforcement action against the banks to disgorge them of their ill-gotten gains."
"Other municipal borrowers who have taken legal action against the banks that sold them these swaps have recovered millions of dollars," Bhatti stressed.
The Rauner administration says it is reviewing the state's swap agreements.
"Governor Rauner inherited these swaps from Governor Blagojevich," Rauner spokeswoman Catherine Kelly said in a statement to Progress Illinois. "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."
The Grassroots Collaborative*, a coalition of 12 membership-based organizations in Illinois, has worked for years to shed light on interest rate swaps, particularly those held between big banks and the city of Chicago as well as its public school system. In a win for the group, the Emanuel administration delayed its proposal last week to spend $106 million in borrowed money on voluntary swap termination payments. The plan was delayed at the request of the Chicago City Council's Progressive Reform Caucus.
"The city council action last week was huge," said Grassroots Collaborative Executive Director Amisha Patel. "The fact that the city council took action to delay voluntary payments of $106 million that otherwise, if it were not for our organizing, would have absolutely happened is a big step forward."
However, the Grassroots Collaborative's work to "take on toxic interest rate swaps" is far from done, Patel said.
Now that the report has been released, the group plans to push for legislative hearings on the state's swaps. The long-term goal, Patel said, is to "win back money for the state."
"Our campaign will be to push and pressure to have those deals renegotiated to make sure that swap termination fees aren't hanging around our necks, but also to really push the attorney general to sue for fraud," she said. "We need to have legal action to sue the banks to recover this money back for the state of Illinois."
*The Service Employees International Union Healthcare Illinois Indiana is a member organization of Grassroots Collaborative. The SEIU Illinois Council sponsors this website.