Rutherfor d's office will have $7 billion in assets available
throughout August that could be move into an account protected by
the Federal Deposit Insurance Corp., or FDIC. The money is in
different investments, revolving around mainly U.S. Treasury
securities, that last from 24 hours to a month. The first of that
money will be available Tuesday morning.Rutherford said
determinations about moving the money to the temporary account will
be made on a daily basis, depending on what happens to the federal
debt limit in Washington, D.C. A new wave of fiscal conservatives in
Congress demanded cuts in spending in exchange for increasing the
debt ceiling, throwing a wrench into what has been the pro forma
task of raising the limit on how much the federal government can
owe.
If the amount of debt the federal government can have wasn't
raised by the end of the day Monday, the United States could default
on its debt for the first time in its history. A default could
launch events that further weaken the frail economy and damage
anyone who has invested in the market.
The accounts into which Rutherford is discussing moving the
state's money in a worst-case scenario don't have a limit on how
much the FDIC will insure, unlike a personal savings account, where
the FDIC will cover up to $250,000.
But there is a catch.
The transaction accounts are zero-interest accounts created in
legislation that was meant to prevent another fiscal meltdown like
that of 2007. These temporary accounts last until Dec. 31, 2012, and
while Illinois' $7 billion would be insured, it also wouldn't be
earning any money.
"My primary objective, as the state treasurer, is to safeguard
the treasury to not lose money. Secondary to it is, if we could get
some type of an interest, we want to try and do that, but that's
secondary to security," Rutherford said.
Despite the volatility of the markets, Rutherford's office
decided to reinvest about $1 billion of state money and $1.55
billion of local government money into the market Monday. Those
dollars were sunk into investments that, once locked in at a certain
rate, don't change.
Rutherford estimated the state will bring in about $22,000 in
interest on those and other investments Monday.
In fact, the uncertainty in the U.S. Capitol has benefited
Illinois' finances recently, because the return on some short-term
investments has increased the longer the debt-ceiling debate rages,
said Rutherford.
George Pennacchi, a professor of finance at University of
Illinois in Urbana-Champaign, said that's likely, because the longer
Washington, D.C., goes without a solution, the more timid investors
are.
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While the state's investments gave better returns during the past
several weeks, it's important to add context to Rutherford's
assessment, Pennacchi said.
"Interest rates were close to zero; now, they're maybe in the
range of about 30 basis points, which is about three-tenths of 1
percent," Pennacchi said. "It's maybe a five- or sixfold rise in the
interest rate, but it's still pretty close to zero."
Pennacchi added that those return rates could recede, once the
federal government decides on a resolution, and that those rates
fluctuate on a daily basis.
A plan moved through Congress to raise the nation's debt ceiling
while at the same instituting cuts, mainly in discretionary and
defense spending.
"This deal is not perfect, nor the deal many of us would have
made ourselves, but in the end and after weeks of partisan
differences, both sides have come together and compromised to avoid
an economic catastrophe," U.S. Sen. Dick Durbin, D-Ill., stated
Monday in a news release. "This agreement will begin the process of
reducing our deficits and ensuring our long-term recovery. But over
the next weeks and months, we must do all that we can to make
certain that a balanced and fair process follows that protects the
most vulnerable in our society."
Durbin was joined by U.S. Sen. Mark Kirk, R-Ill., in support of
the plan.
"The best way to achieve economic stability, reassure our allies
and strengthen financial markets is by tackling our unsustainable
spending trend. This deal is a balance of immediate cuts and a
promise of long-term reforms, coupled with a strong backstop. I am
optimistic this bipartisan plan will pass with strong support from
both parties and we can prevent an American default," Kirk stated in
a news release.
President Barack Obama said he would sign the deal if it makes it
through Congress.
[Illinois
Statehouse News; By ANDREW THOMASON]
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