Muni Refi

This one is from the Blog of San Diego. It's about San Diego, but its also about Encinitas.

03/24/10 How the Mayor's staff lied about the $185 million bond.
by Pat Flannery


Have you ever had a sickening feeling that someone is lying to you but you can't quite put your finger on how they are doing it? That's how some members of the City Council must be feeling regarding the Mayor's contentious $185 million "lease-lease" bond issue - those who are not in on the lie, that is.

At Tuesday's adoption hearing Carl DeMaio expressed frustration at Chief Financial Officer Mary Lewis and Debt Management Director Lakshmi Kommi. He then changed his vote to a "No" from the "Yes" he cast on March 9, 2010 at its introduction. It now has two votes against it. It will need 6 votes on April 26/27 to approve its Preliminary Official Statement (POS), the final step before issuance.

I am hoping that either Sherri Lightner, Tony Young or Marti Emerald will yet take the moral high road on this deeply flawed refinance deal and say "No" to the Mayor and his Wall Street cronies.

Here is the big lie that is being told to the City Council by Mary Lewis and Lakshmi Kommi: they keep saying that the City is obligated to take out the Bank of America's $103 million 2009 loan by June 2010 (they prefer to use "refund" rather than "refinance").

I am not sure that even Carl DeMaio gets the cunning of what Lewis and Kommi are doing to him, but at least, unlike most of his colleagues, he actually cares. He keeps asking Lewis and Kommi for an economic justification for refinancing a 5.2% interest rate to a 5.7%, as required by City policy. In response, Lewis and Kommi draw a distinction between an "economic" refunding and a "non-economic" refunding. A "non-economic" funding would be a bit like a "force" in baseball.

But has this (financial) batter, the City, really become a (financially) forced runner? I did a thorough examination of the paperwork to test the Lewis/Kommi contention, that the City really has no choice but to "take out" B of A's $103 million loan with another lender. If so, Lewis and Kommi would be right, the refinance would not be an "economic refunding", it would be a "force play". If not, Lewis and Kommi are lying.

Here is the Independent Budget Analyst's (IBA) Report from when this bond was first attempted on April 1, 2008 (the irony of that date will not be lost on anybody who watched the Item being heard at City Hall on Tuesday and this - more about that incident later).

Note that on page 4 of the IBA Report, its author, Jeff Kawar, wrote:

"The 2008A Bonds (it started out as 2008A but because of a delay it became 2009A) have been structured with a two-tiered pricing that establishes a fixed rate for the first two years (estimated to be approximately 3.46%) and, if necessary, resets the fixed rate for years 3 through 10 at 2.25% above a specified Bank of America cost of funds rate. If the fixed rate for years 3 through 10 were to have been reset earlier this month, it would have been approximately 4.45%".

In his Conclusion, on page 5, he wrote:

"The proposed 2008A Bonds are effectively a two-year financing with a firm obligation to refund or re-price the debt in June of 2010".

Here is an Executive Summary given to City Council on April 1, 2008 by Lewis and Kommi themselves. They confirm the above IBA Report.

On page one they wrote:

"Therefore, instead of fixing an interest rate for the full 10 year borrowing term which would be higher than for a borrowing term for 2 years, working with the Purchaser, a two-tier pricing (described below) was structured: a lower fixed interest rate (based on a 2-year index plus fixed spread) for the first two year period and if the City is unable to refund the 2008A Bonds by 2010, a higher interest rate (based on an 8-year index plus fixed spread) for years 3-10."

But Lewis and Kommi are now telling the City Council that the City is obligated to "take out" Bank of America in June 2010 with another lender, when all it is obligated to do is reset according to a pre-agreed formula.

Here you will see and hear them repeatedly and shamelessly telling the City Council that the City has an obligation to "take out" Bank of America with a new loan on the open bond market.

That is a flat out lie for which they should both be fired.

The truth is that the City negotiated a low "teaser" rate for the first 2 years of a 10-year loan.

In June 2010 the loan automatically resets to a slightly higher fixed rate for the remaining 8 years, until 2019. That rate is currently 5.2%. Not a bad deal, better than what they can get on the open bond market right now. We are NOT being forced to go to the open market for another 8 years.

Yet Sanders wants to wipe out this bought-and-paid-for $103 million loan, fixed at 5.2% for 8 years. He wants to refinance it at 5.7%. Why? He wants to pay Wall Street $1.8 million in fees for the privilege. If we cannot get one more City Councilmember to oppose this madness on April 26 we deserve what we get from City Hall. Surely one of the other six will join DeMaio and Frye to defeat this obscene waste of public money.

So, why on earth is Sanders pushing this $185 million "bond-doggle"? His CFO assured City Council that he doesn't need to do it for budget reasons. Nor can he do it for policy reasons as this "refunding" would not comply with the City's strict policy requiring an "economic saving". The proposed "take out" refunding would increase the interest rate by a half percent, not decrease it. That is a denial of good government. It is a waste of public money.

Why is Sanders' CFO required to tell such a blatant lie to keep her job? She has said that this is not being done to save the City a short term $3 million in annual debt service (principle and interest). Besides, only the interest portion of that $3 million "savings" would be charged to the General Fund, the principle on these loans is charged to various capital funds.

The Mayor is telling us that he has no choice but to add $100 million long term debt, for virtually no short term gain. Does he think we are stupid?

Maybe he is just a sucker for slick Wall Street salesmen, but my guess is that it is something else, like an elaborate smoke-screen to free the Chargers from their Qualcomm debt. Debt-free the Chargers would get a clean bill of health from the NFL to go wherever they please.

What's in it for Sanders? A nice job with the NFL? He likes those Red Cross, United Way type of jobs, where he doesn't have to go to work every day. He could even have an apartment in New York, near Wall Street, near where his wife comes from. Our Jerry is no fool.