Monday, March 2, 2009

How Smithgall gambled and lost millions for City

NewsLanc sent the following inquiry to Patrick S. Hopkins,Business Administrator, City of Lancaster

"The Feb. 25th New Era article tells how five year ago the City 'entered into a deal with Wachovia Bank to refinance a series of municipal bonds, essentially replacing one set of bonds for another.' The idea was to lower the average debt service in order, in part to free up bonding capacity for other financing.

The article goes on to say that, as a result, the City may lose $2.9 million as a result of 'the bond insurer who was part of the deal had its credit rating downgraded.'

Who was that "bond insurer?" Was it Wachovia?"

Hopkins replied as follows:

Hopkins replied as follows:

"The New Era article didn't make the swaption issue quite as clear as it could have. The issue is complicated so I created the attached Q&A for the presentation I made to the City Council Finance Committee last week.

Suffice it to say that the $632,500 the City received from Wachovia for this swaption in 2004 has turned out to be a terrible deal for the City because of current market conditions. Mayor Smithgall probably said it best when he was quoted in the New Era article saying,"When you do a swaption, you bet on the future." Knowing that, the Smithgall Administration executed this swaption and used the proceeds from this and two other swaps executed at the same time to balance the 2004 General Fund operating budget (not to "pay off some debt early" as the New Era article stated).

On the list of three options presented in the Q&A, our recommendation was Option #3. Our goal is to wait out the bad market and then issue long-term fixed rate bonds and terminate the swap in the process.

This Q&A should answer your questions on the Wachovia swaption, but let me know if you have other questions.

Patricks S. Hopkins Q&A