CHICAGO - Illinois Treasurer Alexi Giannoulias yesterday announced he would reallocate as much as $1 billion of the state investment portfolio his office manages, depositing it in state banks and credit unions in an effort to ease the credit crunch and improve state earnings.
The office, which currently invests $1.7 billion in financial institutions, hopes the new move will free up bank lending to state businesses and consumers.
"It's critical that Illinois take steps now to ease this crisis and get financial institutions lending to local businesses and consumers again so that this international crisis does not spread to other sectors of the Illinois economy," Giannoulias said. "Current market conditions have created a unique situation where we can wisely use state investments to help Illinois residents obtain loans and businesses expand while at the same time getting the best rate of return for taxpayers."
Under the current program, known as Access to Capital, approved banks and credit unions can request state deposits at market rates which are published each morning on the treasurer's Web site. The deposits cannot exceed more than 10% of a bank's total deposits, and no more than $100 million can be invested in any single institution.
The new program, which will complement the existing one, will allow banks to request up to $25 million of the $1 billion with the same 10% rule still applied. Banks would be required to return the state's deposits within a year.
The treasurer's office noted that as of yesterday, one-year deposits in state approved financial institutions paid an interest rate of 3.38% compared to the state's other traditional investment options such as the one-year Treasury bill, which was yielding 1.16 %, and money market funds that were paying between 2.2% and 2.75%.
Giannoulias portrayed the investment shift as a means to aid the state's ailing economy and boost its earnings potential. It follows his recent warning that current estimates show the state will earn only between $138 million to $180 million on its portfolio in the current fiscal year, down from $375 million in fiscal 2008 and $426 million in fiscal 2007.
Other news in recent months has pointed to a growing fiscal crisis in Illinois, which faces its own cash crunch that has led to a backlog of unpaid bills that reached $1.8 billion in the last quarter along with record payment delays.
The treasurer's office manages the investing of about $8 billion raised from state taxes and fees and another $6 billion from state agencies, local governments, and other taxing bodies. Illinois invests in fixed-income assets, including securities and some short-term, non-asset-backed commercial paper. The office does not buy stocks.
Any state or federally chartered bank or credit union that is an approved depository is eligible to participate in the expanded program. Banks not chartered by the state must have a physical location in Illinois.
The major banks in which the federal government recently committed to buy equity are not eligible. The treasurer's office will make half of the $1 billion available immediately, with the additional $500 million being made available in monthly increments between December and March.
Giannoulias said the investments are protected in that the financial institutions must fully collateralize the deposits. The office's investment policies are governed by state statutes and no changes in law in the office's internal policy rules are needed to implement the program.
In a statement, the Illinois Bankers Association praised the move: "Illinois banks welcome this additional access to state deposits, which will help participating banks by increasing their liquidity, enabling them to offer more loans to their communities."
