LOS ANGELES-A motion was drawn up that aims to renegotiate interest rate terms with two banks on May 2.
The motion was created by Councilman Paul Koretz and seconded by Councilman Gil Cedillo, that urged the City Council to either renegotiate or terminate its agreement with the Bank of New York Mellon and Dexia over what is known as interest rate swap deals.
The motion stated that it was created due in large part to the findings from a report entitled “No Small Fees” by the Fix L.A. Coalition. The report from March 25 found that the city of Los Angeles paid over $200 million in fees in 2013 to the two banks, while only $163 million was directed to the Bureau of Street Services for repairs and other infrastructure related costs. The large payment was due to a series of interest swap deals that, according to Councilman Koretz’s motion, allowed the city to save money by converting bonds with a fixed interest rate to have variable rates.
This deal, struck between Los Angeles and the two banks in 2006, would have the city pay the banks a fixed interest rate while the financial institutions would pay the city at a variable rate that the city could use to pay the interest on the bonds.
The economic crash of 2008 had the Federal Reserve drop interest rates to allow banks easier access to funds, which had the side effect of locking in the city to a fixed rate that was well above the market rate at the time. New York Mellon and Dexia were able to enjoy a lower variable rate that was owed to the city. The city is now forced to pay $4.8 million a year until the deal concludes in 2028, which would have the city pay a total of $65 million over the course of that time frame.
Officials had previously attempted to terminate part of another interest rate swap in 2012, which ended up costing $26.1 million to do so. The motion then stated that the banks would allow the city to exit the terms of the deal if it could pay $24.7 million in cancellation fees.
The motion also aimed to have New York Mellon and Dexia cancel the deal without incurring any further cost at the expense of city taxpayers in addition to forcing the banks to pay back an estimated $65 million in “unfair profits and termination payments” since 2008. If the banks are unwilling to negotiate, then the City Council would be urged to terminate current and future business with the financial institutions.
If the motion is passed, the Office of Finance, with the City Administrative Officer and the Chief Legislative Analyst must report to the Budget and Finance Committee within 30 days with progress on the negotiation with the banks. At the moment, the motion has been passed to the Budget and Finance Committee for further review.
