Oakland to Issue Goldman Sachs Rate Swap Memo
Not only will this critical item be on the agenda of the City Council in April, but the City Administrator's office is now planning to issue an explanation memo on the city financial deal that is angering many in the community.
At issue: How the city will be able to cancel, or size down, a deal with Goldman Sachs that is costing Oakland roughly $5 million a year.
Goldman Sachs rate swap problem began in 1997 when the city needed a heavy infusion of cash and as part of issuing its variable rate bonds, formed an agreement with the New York-based financial firm Goldman Sachs, which allowed for a fixed rate, 5.6 percent, on Oakland's bond debt payments.
The fixed rate with Goldman Sachs became a problem when the markets collapsed in the Great Recession and the federal government lowered its lending rates dramatically to near zero. Suddenly the city's actions began to haunt it as it payed up millions annually just to make due on the rate swap. According to media reports, so far, Oakland has paid $26 million to Goldman Sachs and by 2021, the city could pay out up to $46 million.
This issue has swirled around City Hall for the last few years as the Recession and its recovery drags on and the Occupy movement shines a financial spotlight on city contracts and bonds.
Assistant City Administrator Scott Johnson said in an email that to date, the city has not lost money on the swap deal. Instead, Oakland has realized a net savings of roughly $9 million because of key actions connected to bond debt savings and payments to the variable rate index.
In addition, "The city has benefited by approximately $3 million to date in debt service savings due to the lower net interest rate the city paid on the swap compared to what would otherwise have been paid in debt service payments pursuant to the original debt payment schedule on the bonds," Johnson wrote.
Despite the fact that the deal may have saved the city money initially, it's clear that with interest rates at historic lows, the deal does not make good financial sense for Oakland.
Johnson said that the city reached out to Goldman Sachs in June 2010 to inquire about ending the swap deal.
"Given the city’s budget/fiscal condition, terminating the swap was cost prohibitive since the market value of the swap investment agreement was approximately $17 million at that time and the city did not have the resources to terminate the agreement by paying the market value of the swap investment security," he wrote.
Since that time, Johnson said, the city has tried to work with the financial giant on finding ways to get out of the deal.
"Goldman has expressed their commitment to working with the city in developing options to terminate the swap," Johnson said.
The city has no other swap deals in place and Oakland would like to have the issue resolve by July 2012, Johnson added. He said that an information memo will be "issued shortly" by the City Administrator’s Office describing the swap and the status of the efforts to terminate the deal.
A newly formed community coalition against the Goldman Sachs deal has formed and it includes the Allen Temple Baptist Church, labor group SEIU and grass roots group Block by Block Organizing Network. (See photos from the group's Feb. 21 press conference HERE.)
Rev. Daniel Buford of the Allen Temple Baptist Church said the city can take the lead offered by both the local governments of San Francisco and Los Angeles, which were able to get out of their toxic swap deals with Goldman Sachs.
"First thing I'd like for them to do is get a backbone," Buford said of Oakland city officials. "They need a collective backbone and they need to stand up the same way the City Council in Los Angeles and others have done."
Councilwoman Libby Schaaf said a sub-committee of Council voted to put the matter on the City Council agenda in April.
Source: Oakland Local [http://m.oaklandlocal.com/article/oakland-issue-goldman-sachs-rate-swap-memo]