SPRINGFIELD — Illinois Treasurer Dan Rutherford wants to use the federal government to protect the state’s money — from the federal government.

By Andrew Thomason

SPRINGFIELD — Illinois Treasurer Dan Rutherford wants to use the federal government to protect the state’s money — from the federal government.

Rutherford’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 isn’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.

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 six-fold 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.

There is a plan moving through Congress that would 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 said.

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.

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