San Diego Business Journal

The city of San Diego? second trip out of the debt penalty box in six years turned out to be a good one.

On May 6, the city, through its Public Facilities Financing Authority, issued $453.8 million in revenue bonds to refund older debt and pay for repairs and upgrades to its aging sewer system.

The bonds were in big demand by investors, and priced at a relatively low interest rate, just above 5 percent, which will save the city millions in the long term, said Mary Lewis, the city? chief financial officer.

?e had $1.1 billion in orders for about $450 million in bonds we sold,?said Lewis. ?t? a good signal that we?e in demand and that investors are interested in holding San Diego paper.?p>Until January, when the city issued $157 million in bonds for its water system, the city had been effectively locked out of the municipal bond market starting in 2003.

The city revealed then that it had omitted key financial data in past bond disclosure documents concerning the size of its obligations to its employee pension fund, and its sewer revenue fund. Those revelations led to investigations by multiple federal and state agencies, credit ratings downgrades, an in-depth probe of the fraud, and an overhaul of its entire internal control system.

One investigative report alone, which covered the factors and culpability behind the financial cover-up, cost the city about $20 million.

But even more costly was the city? inability to borrow funds from the public markets. Because of the excessive costs resulting from the city? tainted credit ratings, it was relegated to borrowing money from banks at higher interest rates.

Improved Ratings

In recent years, the city slowly reissued financial reports for five past fiscal years as a prerequisite to getting the bond rating agencies to resume rating new debt issues.

The long slog back to the debt markets appears to have paid off. Two of three rating agencies bumped up its ratings on the new debt, while one maintained its rating.

Standard & Poor? assigned the debt with an A+ rating, while Fitch gave it an AA- rating, and Moody? Investors Service maintained its A2 rating.

Those ratings, among the highest available, helped secure an average coupon interest rate for the bonds of 5.1 percent, while the interest cost on the debt was 5.04 percent.

?n terms of what (other debt) was sold recently, it was a very good rate,?Lewis said.

Matt Fabian, managing director at Municipal Market Advisors in Massachusetts, said yields on tax-exempt municipal bonds have fallen by 30 to 40 basis points (a basis point is one-one hundredth of 1 percent) during the past month, mainly because new investors are getting into the market as a result of the Build America Bond program, a component of the federal government? $787 billion stimulus package.

The Series A bonds that totaled $453.8 million included refunding a 2007 note for $224 million; $145 million in new 30-year bonds; and $50.5 million for refunding old sewer bonds issued in 1997. The remainder of the debt covers a required reserve fund, and to pay issuing costs.

Lewis said the refunding of older bonds, and getting reduced interest rates, will save the city nearly $7.5 million during the life of the bonds.

More Sewer Upgrades

The city has plans for borrowing millions more to upgrade its sewer system. In March, the City Council authorized finance officials to arrange up to $1.1 billion in debt for the system.

The city plans to issue another $400 million-plus in sewer bonds this year.

?here? a lot of cast-iron pipes that have to be replaced. We also have a consent decree (with the Environmental Protection Agency) to replace a certain amount of miles of pipe every year,?Lewis said.

If the city had to rely on borrowing this money from banks it could have been in a serious bind because some of its lenders, including Bank of America, are severely reducing the amount of credit they?e extending because of a host of problems these lenders are dealing with this year, said Jay Goldstone, San Diego? chief operating officer.

?eing back in the public markets is huge at this particular time,?Goldstone said. ?t couldn? have come at a better time.?enews_Column=-1