For a second consecutive year, San Diego will borrow money from a commercial bank to pay its bills because it cannot issue short-term bonds as it usually would.
Plagued by ongoing criminal investigations into alleged securities violations and a failure to complete two annual audits, city officials have decided not to issue bonds, called tax revenue anticipation revenue notes, for the city’s short-term cash flow needs.
Instead, the city has arranged to borrow funds not to exceed $185 million through a credit line from Bank of America. The City Council is scheduled to decide on the agreement at its June 7 meeting.
Although the exact interest rate the city would have to pay is unknown until the funds are allocated, it will range between 2.6 percent to 3.5 percent annually, according to a city manager’s report.
Lakshmi Kommi, San Diego’s financing services manager, said the interest rate would be approximately the same if the city issued TRANs notes.
The city needs to borrow money because the property taxes it collects are distributed only twice a year , in December and April , and the city has bills to pay throughout the year, Kommi said.
The city usually borrows the funds through the TRANs notes in public offerings that are generally purchased by institutional investors. For last year, and the coming fiscal year that begins July 1. The city’s main bank is BofA, which is now based in Charlotte, N.C.
Kommi said the city won’t be borrowing the entire authorized amount and will use the credit line only on an as-needed basis.
“We’ll be borrowing the funds as they are needed,” she said. “If we need about $20 million next month, then we borrow $20 million.”
Although the maximum authorization on the BofA credit line last year was for $150 million, the city borrowed only about $114 million, Kommi said.
At the time the agreement was approved, the city was paying about 1.7 percent on the money.
While the city won’t be paying exorbitant interest rates for the funds, San Diego would likely get lower rates had the city had the ability to issue public bonds, said Tony Cherin, a San Diego State University professor of finance.
“I don’t think this would be their first choice, but because of the current conditions, this is another way out,” Cherin said.
In the wake of an ever-growing financial crisis linked to a $1.4 billion under-funded deficit in its employee pension fund, San Diego’s credit rating has taken a beating in the past year.
All three credit rating agencies downgraded San Diego’s issued public debt, and one agency, Standard & Poor’s, has stopped issuing ratings because the city has not released financial audits for its 2003 and 2004 fiscal years.
On May 27, Fitch Ratings downgraded most of San Diego’s bonds to BBB+, a notch above junk bond status. In its report on the reasons for the downgrade, Fitch cited the resignation of Mayor Dick Murphy, an upcoming special election to replace him, several ongoing criminal investigations, irregular disclosures, and conflicts of interest presenting obstacles to the city adopting a sound budget for 2006.
Fitch also noted San Diego’s strong economy, diverse revenue stream, and the tentative short-term agreement with BofA.
For many years, city debt had been rated AAA by Fitch and two other rating services, among the highest in California, but that ended after the city first revealed “errors and omissions” to its 2003 audit in early 2004.
Mary Colby, the vice president of municipal research for Charles Schwab Investment Management in San Francisco, said it was unusual for a large city such as San Diego to borrow funds from a commercial bank.
“I can’t think of a specific instance,” she said. “But the situation San Diego is in right now is one of a complete lack of knowledge. When there’s a lack of information like this, the markets will just step back.”
Kommi said despite all the talk of filing for bankruptcy to resolve the city’s financial problems, the city is not experiencing any inability to pay its immediate bills.
“Yes, bankruptcy as a policy issue is a concern, but really in terms of liquidity, the city is intact,” she said. “The city has the ability to pay all of its bills as they come in.”
