The Los Angeles City Council unanimously voted Wednesday to try to get out of borrowing deals with banks that advocates say are siphoning off money from the city.
But at the council meeting, questions arose about how and where the city could use any potential money saved from renegotiating the deals.
The measure asks city negotiators to pressure the Bank of New York Mellon and Dexia to restructure or terminate the so-called interest rate swap deals at no cost to the city, and to look at whether the city could sue if the banks resist. If the banks refuse, the city will look into 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 2007-2009 financial crash — locked the city into interest rates that are higher than those now available, thanks to 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 past several months, union coalition Fix LA has criticized L.A.'s Wall Street interest spending by pointing out that the city could use more money to repair broken sidewalks, erase cuts in the number of city crossing guards and clean alleys filled with trash. The tag line 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 that "not one dollar" saved from these swaps could be put 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."
Any money saved on the swap deals is restricted to the wastewater bond 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 the city should still want to save money where it can, and that the money could be used for services associated with the wastewater bond, including "storm drain care, our sewer systems and water treatment plants that keep Angelenos from getting sick."
The council's vote Wednesday makes L.A. the biggest city to try to get out of interest rate swap deals that advocates say soured after the Great Recession.
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 into 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 officials sought to stimulate the economy, noted 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 these swap deals, and could pay in excess of $65 million more between now and 2028.
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.
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