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L.A. council votes to pressure two banks to redo interest rate swaps

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The Los Angeles City Council voted unanimously Wednesday to seek to redo borrowing deals with two banks that advocates say are charging excessive interest rates and eating up money that could help with major infrastructure repairs.

The vote made Los Angeles the biggest city so far to try to get out of so-called interest rate swaps that soured during the Great Recession.

But questions immediately arose about how and where the city could use any potential savings if the deals are renegotiated.

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The measure asks city negotiators to pressure the Bank of New York Mellon and Dexia Credit Local to restructure or terminate the deals at no cost to the city, and to look at whether the city could sue if the banks decline. If the banks refuse, the city will also explore terminating all current business with the banks and excluding them from future business.

Councilman Paul Koretz, who called for the action, said the banks have profited unfairly because the deals — made before the 2007-09 financial crash — locked the city into interest rates that are higher than those now available as a result of the Federal Reserve’s effort to spur the economy.

“We need to hold Wall Street accountable where others have not, and let Wall Street know we’re too big to ignore,” Koretz said just before the vote.

Over the last several months, union coalition Fix LA has criticized the amount of interest L.A. is paying Wall Street and pointed out that the city could use some of that money to repair broken sidewalks, hire more crossing guards and clean alleys filled with trash. The subtitle of a coalition report on the city’s swap deals is “Invest in Our Streets, Not Wall Street.”

But City Administrative Officer Miguel Santana said “not one dollar” saved from the rate swaps could go into the city’s general fund.

“These dollars cannot be used to pay for police officers, or pay for streets or trim trees,” Santana said at Wednesday’s meeting. “It’s against the law.”

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Any money saved on the swap deals is restricted to the wastewater bonds associated with the deals, Santana said.

In a statement, Fix LA officials said they know the money can’t be used for city streets, but called Santana’s emphasis on that point “a bureaucratic excuse.”

They said that the city should still want to save money where it can, and that the money could be used for services associated with the wastewater bonds, including “storm drain care, our sewer systems and water treatment plants that keep Angelenos from getting sick.”

In 2006, the city entered into interest rate swaps with Bank of New York Mellon and Dexia Credit Local to reduce borrowing costs for $316.8 million in wastewater bonds issued in 1988.

To take advantage of what were then historically low interest rates, the city locked in a fixed rate of 3.34%. City budget analysts thought the deal would protect the city against an expected rise in rates.

But when the recession worsened in 2008, interest rates went even lower as the Fed sought to stimulate the economy, said Lisa Cody, research policy analyst with Fix LA. She calculates that the city has already paid more than $104 million in debt service tied to the interest rate swaps, and could pay in excess of $65 million more by 2028, when the bonds mature.

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Getting out of the deals would cost $24.7 million in termination fees, according to city budget officials. The analysts have said paying those fees doesn’t make economic sense.

soumya.karlamangla@latimes.com

Follow @skarlamangla on Twitter for more city and county government news.

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