Monday, February 25, 2008

County Bond Costs

They just went up substantially on bonds covering retirement costs, and effectively shrinks funds available for, among other things, the Parkway, which is unfortunately way down on the list of funding priorities.

Bob Shallit: County's bond costs shoot up
By Bob Shallit -
Published 12:00 am PST Monday, February 25, 2008

Sacramento County's financial officials got a huge shock last month.

Their monthly interest payment on a single bond increased by more than $500,000.

The hit is fallout from continuing turmoil in the nation's credit markets and specifically nervousness affecting a class of variable-rate bonds called auction-rate securities.

Long known for low rates and stability, these securities have turned highly volatile in the past couple of months, dramatically increasing interest obligations for municipalities and other big borrowers across the country.

In the case of Sacramento County, the interest rate climbed in one month to 8.5 percent from 6.5 percent on the $346 million still owed on a pension obligation bond. The county's monthly interest payment climbed to $2.29 million from $1.77 million.

"That was too much of a jump to sit back and see what happens," says Chris Marx, the county's debt officer.

As a result, she and other officials are racing to "re-fund" that obligation – and another smaller one for airport expansion – by obtaining another kind of bond and paying off the old ones.

"There are less volatile products out there, absolutely," Marx says.

An underwriter has been hired to look at those alternatives and a proposal for new financing will be presented to the Board of Supervisors at its March 4 meeting, Marx says.

(The city of Sacramento does not have any auction-rate securities, says interim Treasurer Tom Berke.)

The rising bond costs here show just how widespread the ripples are from a crisis tied partly to the collapse of the housing market.

Worries have been particularly acute in the auction-rate market, where municipalities obtain long-term loans that have rates dictated by what investors are willing to pay for them at weekly and monthly auctions.

In some recent cases, there have been no buyers at all for the securities, causing interest rates to "default" to extremely high rates. That hasn't happened with Sacramento County's obligations, Marx says, and the higher payments so far have been "within budget parameters."

But it's clear the county isn't waiting around to see if that might change.