B12 Solipsism

Spreading confusion over the internet since 1994

Illinois Seeks Sweet Sweet Wall Street Cash

without comments

Flag Waving

I knew Illinois budgets were out of whack, but didn’t quite realize how bad the deficits are, and how far behind Illinois is on meeting its financial obligations. Yikes. Illinois has been operating at a deficit since 2001, and each year getting deeper and deeper in the hole.

Times have gotten so tough for the Illinois state government that it has begun turning to Wall Street trading houses and hedge funds to help pay its bills.

The state owes more than $4.5 billion to vendors large and small, ranging from prison-cleaning crews to schools for the disabled. Tax shortfalls and pension obligations continue to leave the state light on cash.

Quietly, the state has begun reaching out to Wall Street and other investors with a novel plan to plug this shortfall. Instead of further tapping the public debt markets, Illinois is trying to tap private sources for short-term cash to repay vendors.

Such efforts reflect the pressure many U.S. states face and raise questions about the lengths some governments should go to in funding their operations. And they put Illinois, which has endured budget strains for a decade, in the uncomfortable position of pitching its fiscal problems as someone else’s profit opportunity.

The Illinois approach works like this: Investors take over the delinquent bills owed by the state to its vendors. Those vendors are due a 1% penalty each month after the state falls behind by 60 days. The financial investors make the vendors whole and are entitled to 1% monthly penalties until the state pays the investors back.

(click to continue reading Illinois Seeks Wall Street Cash – WSJ.com.)

Even though Illinois is constitutionally obligated to pay its debts, eventually, this seems like a bit of a risky investment. What if the state government can’t reign in spending, or agree to raise taxes? Illinois could just default on the bonds. One unnamed hedge fund declined for exactly this reason:

At least one prominent New York hedge fund passed on the opportunity, fearing that profiting from a cash-strapped state’s taxpayers and small vendors would appear unseemly. Another of its worries: The state mightn’t ultimately make good on its promises.

Written by Seth Anderson

December 11th, 2010 at 10:30 am

Posted in Chicago-esque,government

Tagged with ,

Leave a Reply