Thursday, Jan. 4, 2007 | The City Council will consider taking out two private loans this month that would cost about $600,000 more per year than if the city were seeking the funding from the municipal bond markets, a situation created by the city’s past bookkeeping blunders and exacerbated by urgent city business.

Among a $2.5 billion citywide budget, the amount appears minimal, but it comes at a time when the city is pressed to mend a gap of at least $24.6 million in the coming fiscal year, even after a proposed elimination of hundreds of city jobs.

A climate of low interest rates has persisted during the city’s separation from Wall Street, allowing it to continue borrowing from private investors who traditionally garner heftier returns than bond buyers on the market. Still, the city has seldom sought money this way, instead waiting out its stay in fiscal purgatory in hopes that it would soon regain its standing in the public markets.

As news of more delays in the long-awaited next step toward attaining the market rolls out, the city will be forced back to private lenders later this month in order to refinance expensive ballpark bonds and to conform to a state health order for its water system.

The added expense represents another reality for a city government that has been struggling to return itself to financial normalcy since past misdealing kicked it into financial and legal ruin three years ago. The Securities and Exchange Commission sanctioned the city in November for downplaying its billion-dollar pension and retiree healthcare deficits on past financial statements.

Those disclosure errors have also prevented the city from receiving the blessing it needs from outside audit firms and the financial ratings houses that withhold San Diego’s entry back to the cheaper, easier money of the public markets, and the city has attempted to clear its name by spending tens of millions on consultants, lawyers and auditors.

The Mayor’s Office had hoped to have the long-overdue fiscal year 2003 audit wrapped up by last October. With the audits still outstanding, the city was forced to seek the loans anyway, Chief Financial Officer Jay Goldstone said.

“While we’re optimistic and getting closer, they missed so many deadlines — that they’ve given us — that economically it doesn’t work for us” to wait,” he said.

The City Council will consider that path when Goldstone presents the two bond packages at a Jan. 16 meeting.

One loan, from Bank of America, would be used to restructure the $156 million bonds used to finance the construction of Petco Park. In the initial ballpark bond transaction, the city was forced to pay high premiums as it faced lawsuits that jeopardized the stadium’s construction. Refinancing the debt was heralded as a money-saver back in 2003, when former Mayor Dick Murphy and former City Attorney Casey Gwinn pitched the idea along with bags of ballpark-style peanuts at a summertime press conference. The savings weren’t peanuts, they kidded at the time.

But, as the city’s fiscal troubles hit home months later, it was forced to hold off on Murphy’s refinancing package while auditors scoured the city’s books for signs of misleading information.

Refinancing the ballpark bonds would save the city about $3.7 million per year in annual payments when compared to the current debt-payment plan, according to city. But that’s still $400,000 more annually than the city would be paying in the public marketplace, city Debt Management Director Lakshmi Kommi said.

Another loan, for $57 million, is being proposed to upgrade the Water Department’s treatment plants in an effort to comply with an order from the California Department of Health Services. The private loan, which will be issued by Morgan Stanley & Co., will be $200,000 more expensive per year because of the city’s inability to borrow publicly, Kommi estimated.

About $3.7 million from the city’s day-to-day budget will be used to pay off the ballpark bonds under the proposed deal, and $2.2 million in money the city collects from water bills will be used to pay off the water bonds.

The city has plans to take out another $477 million in loans to improve the water and sewer systems later this year. It’s uncertain whether the audits will be completed by then, Goldstone said, but if not, those loans would have to be made by private firms as well.

Goldstone said that, while he would have liked to get the lower interest rates available from the public marketplace, the ballpark bond deal his office is proposing results in a deep discount from the current payments. He said that the opportunity was only available because the bonds’ insurer, which picks up a significant chunk of the annual payment back to the current financier, Merrill Lynch, agreed to insure a private placement.

For the water bonds, the state order had to be followed or stiff penalties would apply, he said.

Besides the conclusion of the outside audits, “the other area of uncertainty is where the interest rates will be,” Goldstone said. Waiting for the city to regain its footing in the credit markets could have become a lost opportunity if interest rates rose because it would have been hiked on both public-market and private-placement tracks, he said.

Lower interest rates have allowed the city to take out private loans in the past, most notably a $152 million sewer bond, with a nominal extra cost, Kommi said. Observers, however, said that the city should be prepared for a less-friendly borrowing environment after enjoying historically low rates, but said they are hoping to get to the markets before that happens.

“We’re potentially missing opportunities in the market while KPMG delays the audit,” San Diego County Taxpayers Association Chairman John O’Neill said, referring to the firm handling the 2003 audits. “At least we would have that option, and I would be surprised if we could not do better in the public market.”

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