Orange You Glad I didn’t say Derivatives

You’ve got to love San Diego City Council meetings. They drag on and on (like the nine and a half hour marathon session last December 4) about items of municipal minutia so mundane that even the most wonkish of policy wonks find their thoughts drifting to their next session of “World of Warcraft.” But buried in all this mundanity are often items of extreme importance. Which, of course, the press and public, overwhelmed by the sheer boredom of it all, don’t pick up on.

Like last Monday’s session. And Docket ITEM-200: Variable Rate Debt and Derivatives Workshop for the City Council.

Sounds enticing, doesn’t it? Like going over your insurance portfolio with your sixty-two year old, loves to talk about fly-fishing and vaguely smells of Lysol agent.

So last Monday the council sat through a long, monotonous presentation on how the city, should it EVER get back into the bonds markets, could pursue various options in reducing short term borrowing costs. All presented in the clearest of businesseeze readily comprehensible by any Ph.D. in economics with a five year post-doc in esoteria.

At the end of the presentation a motion was put forward to bring this topic before the City Budget committee next month to continue consideration of the high-falutin’ investment strategies—using variable rate bonds and derivatives to offset up front financing costs—with an eye towards recommending their adoption by the full council.

And then Donna Frye pointed out the five ton orange elephant in the room.

Orange, that is, as in Orange County which, more than a decade ago, went belly up when the similarly sophisticated investment strategies they had pursued came tumbling down.

Frye asked the workshop presenters to go over the risks of variable rate borrowing. You remember the concept: low initial rates that can skyrocket if conditions change? The kind of borrowing millions of Americans engaged in to afford their overpriced homes? What do they call that market, now? Oh yes, that’s right.

Subprime.

So there is the San Diego City Council all hellbent on signing the City up to engage in volatile interest rate borrowing without even the slightest peep of protest.

Except for Darling Donna.

After going over the risks associated with the scheme the council was being recommended to buy in to Frye then asked which of those risks would be present if the City continued to borrow under traditional, fixed-rate terms. The answer, of course, was none. So Frye asked the obvious question: why should a City bludgeoned out of the bonds markets because of its incompetent financial management even consider reentering those markets using riskier strategies than it ever used before?

The response of her fellow council members was deafening. Or, better said, deaf. The council over road Frye’s motion to reject the proposal out of hand as the snakiest of snake oil and referred the matter to the Budget Committee for further review. From whence it will emerge, months from now, to be considered and adopted by the full council during yet another marathon, bore the world into submission session, no doubt.

So why would the Council even consider getting the City into borrowing strategies which have the possibility of putting the City essentially into the same position as millions of homeowners (homeowners, that is, until the repo orders come down) who were caught in the subprime swamp? Why, for the same reasons that drove millions of Americans into that swamp in the first place.

San Diego, for all the smiley faces Jerry Sanders and many council members try and put on it, is still in a world of financial hurt. The City faces a three hundred million dollar, five year budget shortfall which will get worse as the economy continues to stagnate, is still a billion dollars in the pension hole and has hundreds of millions of dollars in backlogged building and repair projects thanks to its being locked out of the bonds markets for almost five years. Things are getting so tight that there is even talk of privatizing the crown Municipal Jewel, Balboa Park, which needs two hundred million dollars that the City doesn’t have for basic repairs and deferred maintenance.

If and when San Diego returns to the bonds markets it will need to hit those markets hard and heavy, borrowing as much as possible at the cheapest rates as possible. At least, that seems to be how the Council is trying to position the City. Borrow billions now at cheap entry rates, fix things, make everyone happy and then run on that goodwill for a higher office when term limits are reached. That also seems to be the underlying strategy of the Council. And when, in three or five years, the new financial house of derivative and variable rate cards collapses the perpetrators will be off to Sacramento or the Port District or some other home for former San Diego politicians.

Lovely.

But at least these decisions are made right out there in the open, right between “Requests for Continuance” and “City Council Budget Priorities for Fiscal Year 2009.”

With no-one paying attention.

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