L.A. city unions urge officials to end deals with Wall Street banks

City officials combat unions' call for legal action to recoup money they say was lost in unfair bank deals

As Los Angeles labor unions lock horns with City Hall managers over their next employment contract, they are taking aim at deals the city made with Wall Street banks.

The Coalition of L.A. City Unions and its allies have repeatedly urged city leaders to get out of the deals with Bank of New York Mellon and Dexia, alleging they are bleeding the city of desperately needed money.

L.A. lawmakers voted in August to try to renegotiate the agreements. Now, the unions are stepping up pressure on City Atty. Mike Feuer to file a regulatory complaint alleging that the city was not fully informed of the risks of such deals.

But behind the scenes, Feuer has already thrown cold water on that idea, saying city officials understood the risks and ultimately saved money from the financial agreements, according to a confidential report sent to lawmakers and obtained by The Times.

In the Oct. 16 report, Feuer warned against pressing ahead with "very weak, if not frivolous" legal claims.

While the city hasn't hesitated to sue financial institutions in other cases, bringing "meritless litigation" against banks "can only serve to sully the city's reputation and credibility in financial circles," he wrote.

Feuer spokesman Rob Wilcox declined to discuss the report Friday, saying that it remains confidential.

The Fix LA coalition, which includes city labor unions, clergy and community groups, said it was troubled to learn of the advice. City Councilman Paul Koretz, a coalition ally who pushed for the deals to be renegotiated, said it was unfortunate that the city might not pursue legal claims.

Koretz also singled out City Administrative Officer Miguel Santana, the city's top budget official, for his handling of the matter.

"It is troubling that the city may base its decision at least partly on the words and actions of [Santana] and his office, when he and that office have been all over the map in their assertions on this subject," Koretz said in a statement.

The councilman said he would push to discuss the confidential report in public, saying, "It's important that we not whitewash a bad deal."

Santana would not respond to Koretz's assertions, saying only that Feuer's report "speaks for itself."

Mayor Eric Garcetti and city negotiators have said they want the coalition — representing about 20,000 civilian workers — to accept no raises this year and pay more toward healthcare costs. The coalition, in turn, has put the focus on L.A.'s decision eight years ago to enter into two deals known as interest rate swaps to cut borrowing costs on wastewater bonds.

The agreements were meant to lock in historically low interest rates. But when the economy crashed, interest rates fell even lower and the city ended up paying more than the market rate.

Fix LA says the swaps could ultimately cost taxpayers more than $130 million over more than two decades. At a string of rallies and protests, Fix LA has put much of the blame for budget woes on such bank deals.

"The solution is: get the money from the banks — they ripped us off," said the Rev. William Smart Jr., head of the Los Angeles chapter of the Southern Christian Leadership Conference, during a rally last week.

Fix LA called on Feuer to file a complaint with the Financial Industry Regulatory Authority, the largest independent securities regulator in the U.S., arguing that there was "significant reason to believe" the deals' risks were not adequately explained, violating the principle of "fair dealing." A favorable decision could bring millions back to Los Angeles city coffers, Fix LA research policy analyst Lisa Cody said.

Cody and about a dozen activists went to Feuer's office Thursday demanding to know why the city attorney had not pressed forward with a complaint. The activists said they feared that the legal window for action was about to close.

"Why isn't Mike Feuer brave enough to step out there?" Channing Hawkins of SEIU Local 721 asked Feuer spokesman Wilcox.

In his confidential report, Feuer wrote that after a thorough review, city lawyers had failed to unearth any evidence that the banks or underwriters had violated the law, giving them "no good faith basis" to pursue a legal claim. L.A. "has not been financially damaged by the swap agreements," saving nearly $22 million so far compared with an alternative, fixed-rate transaction, he wrote.

To back up those conclusions, Feuer turned to an outside law firm, which also found that there was no evidence the banks misrepresented or failed to disclose any risks. Both Feuer and the outside firm stated that even if the city had a solid case, the clock ran out years ago to file any regulatory complaint over the deals.

Fix LA spokeswoman Coral Itzcalli said the city lacks the marketing documents that would allow it to determine whether officials were fully informed of the risks. The group disputed the idea that the deals were good for the city, pointing to previous statements by city budget officials. At a council committee meeting in June, city Debt Management Chief Natalie Brill said that if Los Angeles officials had known how much interest rates were going to fall, they wouldn't have entered into the swap agreements.

"Their lack of transparency and inconsistency by publicly claiming this bank deal as bad one day and good the next, points to a full investment by [Santana] and the city attorney to protect the banks at the expense of L.A.'s taxpayers," Itzcalli said in a statement Friday. Legal experts, she said, "say it is not too late for a legal challenge and disagree with the city attorney that such a challenge would be meritless."

Bank of New York Mellon and Dexia did not respond to requests for comment Friday.

emily.alpert@latimes.com

david.zahniser@latimes.com

Follow @LATimesemily and @DavidZahniser for news out of L.A. City Hall

Times staff writer Soumya Karlamangla contributed to this report.

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