Tuesday, October 25, 2005 | The city of San Diego made plans Monday to avoid an upcoming loan payment that may have prevented it from replacing dozens of miles of dilapidated sewer pipes over the next year.

In a unanimous vote, the City Council agreed to allow staff to restructure a $152 million loan from Bank of America. City officials had only been making the interest payments on the loan – which they took out in June 2004 – believing that by the time the balloon payments came due to pay it off, they would have already refinanced it with a public bond offering.

They drastically underestimated how long the city would be paralyzed by its lack of an up-to-date audit and a credit rating on Wall Street.

“Who would have ever thought we’d be here today,” said Councilman Jim Madaffer.

Staff members warned that although the city’s enterprise fund could handle the payment that was coming due, it would have prevented them from replacing any of the 3,000 miles of sewer pipes in the city. On a normal year, the city would try to replace about 45 miles of the pipes.

The loan was secured last year as part of a stop-gap measure to keep the wastewater department flush with funds while the city repaired its financial disclosure process and prepared to reenter the public bond market. The city structured the loan so that it would only have to pay the interest while it awaited an audit that many thought was only months away. However, more than a year later, outside auditors and investigators are still far from completing the crucial project.

And so the loan the city thought it would only pay interest on is starting to come due.

“No one thought we’d approach the beginning of amortization cycle of this loan, yet here we are,” said Dennis Kahlie, the city’s utilities finance administrator.

In March 2006, the city would have had to make the first of a $19 million quarterly payment to its sewer fund.

The council’s move allows the city to postpone repayment of the loan until fiscal year 2007.

To get Bank of America to agree to the plan the city also had to provide certain assurances to the bank that if the city went bankrupt – an “insolvency event” according to city managers – the city would guarantee the bank’s investment.

Deputy City Attorney Mark Blake said that because of recent discussions of the possibility of bankruptcy, that type of guarantee is to be expected.

“It’s not unusual to see this type of provision,” Blake said.

The council’s vote Monday also paved the way for receipt of a low-interest $10 million loan from the State Water Resources Control Board. Bank of America had prohibited the city from taking any more debt out for sewer projects without the bank’s permission.

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