Los Angeles City Councilman Paul Koretz, 5th District, has filed a motion that calls on the Bank of New York Mellon and Dexia to renegotiate or terminate an interest rate swap that is costing the city $4.8 million per year.
According to his motion, the interest rate swap was expected to save the city $3.7 million per year, but has resulted in more than $65 million in profits for New York Mellon and Dexia. If the banks do not oblige, his motion calls for the city to cease doing business with the two financial institutions.
“It just seems ridiculous if indeed these banks want to help us,” Koretz said.
In 1998, the city of Los Angeles issued a Wastewater System Revenue Bond to fund improvements to the city’s sewer system, and in 2006, officials refinanced the bonds from a fixed rate to a variable rate, according to the motion.
Since variable rates fluctuate, the city entered into an interest rate swap with New York Mellon and Dexia, which was viewed as a “good faith” transaction at the time, the motion states. However, the economy soured in 2008, and the city is locked into a fixed rate while the two banks were able to benefit from variable interest rates that were “kept artificially low” by the Federal Reserve, the motion states.
Koretz said he is optimistic that the banks will work with the city, as it is not “unreasonable” for officials to request that the banks renegotiate since the transaction was expected to save the city money.
However, if they are unwilling, officials will make the issue more public in an attempt to pressure the banks and ensure that other municipalities are aware of their lending practices, Koretz said. He said the banks have already benefitted from the deal, which the city is locked into until 2028 if it does not act.
“[They’ve] certainly gotten a good return,” Koretz added.
The cost of the transaction has been outlined in a report by the Fix LA Coalition, which is comprised of unions and community groups. According to the report, “No Small Fees”, Los Angeles has recently spent more on Wall Street than it has on its own streets.
“There’s a whole relationship between a lot of the practices of these Wall Street firms and municipalities. It’s been devastating,” said Cheryl Parisi, of the Fix LA Coalition.
She said similar transactions were brought to light when the city of Detroit filed for bankruptcy last year. The city of Los Angeles cashed out an interest rate swap for $26 million last year, Parisi said. According to Koretz’s motion, the banks want an additional $24 million to get out of the remaining interest rate swap.
Many of the deals were done before the recession, and they essentially served as an assurance that the city would have a stable interest rate, she said. However, after the economy crashed, the city was locked into a 3 percent interest rates, while the banks’ rate was at .25 percent, Parisi said.
“So it’s just this huge windfall for these banks,” she added.
Parisi said the recent report is the “tip of the iceberg,” as getting information about the deals is quite difficult.
“Nothing is very transparent,” she said.
The hope is that the city, which has $106 billion flowing through financial institutions, will begin to use more leverage to negotiate more favorable, more transparent deals, Parisi said.
Further, the Fix LA Coalition hopes that the city “in-sources” some investment talent so that it does not rely on outside financial managers, she said.
“We definitely are calling for that,” Parisi added. “We think it’s important to have that check and balance, if you will.”
She noted that since the recession, the city of Los Angeles “decimated” services. According to the report, the city spent $204 million on fees to Wall Street banks last year, while the Bureau of Street Services’ spent just $163 million on city streets.
Koretz said he is not sure if the city has reached out to the banks. His motion calls for the city’s Office of Finance, as well as the chief administrative officer and chief legislative analyst, to report back to the council’s Budget and Finance Committee within 30 days.
When asked why the coalition brought the issue to light and not city staffers, Koretz said said the city has entered a lot of partnerships and formed commissions to find inefficiencies. He credited those moves for reducing the city’s deficit.
“That’s part of how we’ve gotten through all this,” Koretz said, adding that the effort will continue. “We’re working with them to continue to find efficiencies and better ways to do things in a more cost-effective manner.”
He said he doubts that many other municipalities have entered into such agreements with banks, as they are “unusual financial transactions.”
A spokesman for New York Mellon, Kevin Heine, only said that the city used an outside financial advisor to pursue the deal.
“As part of a competitive bidding process on this transaction, the city relied on an independent financial advisor to provide an impartial and objective assessment of the economic benefit of the transaction,” he said.
Representatives from Dexia and the chief administrative officer’s office did not immediately return calls before deadline.
For information, visit www.fixla.org.
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