New York City Comptroller William C. Thompson, Jr. today issued, “The C-Note,” his periodic column focusing on economic and budget issues affecting New York City. Today’s column is titled: “How City Bond Sales Create Savings in Tough Economic Times.”

You can view the column by visiting www.comptroller.nyc.gov and by clicking on the ticker at the top of the home page. In previous weeks, the Comptroller has presented his priorities to help the City weather the storm created by the current economy, provided an outline to better train our future workforce by streamlining the current outdated skills model used by the city, outlined the financial mismanagement in the Yankee Stadium deal, and offered a way for the MTA to help ease its financial problems.

THE C-Note: “How City Bond Sales Create Savings in Tough Economic Times”

By William C. Thompson, Jr.

New York City sells billions of dollars of bonds each year, including both fixed and variable rate debt, to fund important City infrastructure needs such as roads, schools and our water and sewer system.  About 20 percent of the City's bonds have been sold as variable rate or adjustable rate bonds, which typically reset on a daily or weekly basis.  Relative to long term fixed rates, variable rates are historically lower on average, and can result in significant interest expense savings.  However, the advantage of variable rate debt is not without risk as adverse market events can cause variable rates to spike rapidly.

In 2008, the financial crisis sent the variable rate municipal bond market into turmoil.  Dramatic shifts in the credit quality of banks and bond insurers, and the liquidity crunch that followed the Lehman bankruptcy, led to unprecedented volatility and disruptions.  Remarkably, however, despite this turbulent environment, a review of last year’s City General Obligation variable rate expense reveals that the City continued to achieve budget savings by issuing variable rate debt.

Since I entered office seven years ago, the City has issued approximately $4.4 billion of unhedged variable rate General Obligation Bonds, saving the City a total of about $180 million when compared to the cost of issuing these bonds as fixed rate debt. In 2008 alone, the City saved $79 million in debt service expense by choosing to issue variable rate bonds instead of fixed since 2002. The City has also achieved substantial additional savings from variable rate bonds issued in prior years. These savings have been secured by the efforts of my office and the City’s Office of Management and Budget (OMB), which share responsibility for New York City’s debt issuance and management.

While we’ve faced tough times before, this past year represented one of the most difficult marketplaces to accomplish these savings.  We were forced to confront a variety of challenges to the credit markets including:

• ratings downgrades of municipal bond insurers;
• the collapse of the auction rate securities (ARS) market;
• major underwriting firms such as Bear Stearns and UBS Securities exiting the municipal market; and
• extreme liquidity pressures on commercial and institutional banks and money market investors.

To combat these conditions, the City refinanced $1.3 billion of its $2 billion ARS which included credit support from weaker municipal market bond insurers.  Our quick action provided liquidity to the City’s ARS investors after the ARS market experienced widespread auction failures.

In order to support our other variable rate bonds, we replaced liquidity providers who were under significant financial strain with stronger financial institutions, and restructured bank agreements. In addition, we actively monitored the performance of the bankers who managed our variable rate bonds, moving millions of dollars away from those that underperformed relative to their peers.

Looking forward, both my office and OMB will continue to take the steps necessary to achieve budget savings during these difficult times.  These measures include:

• carefully selecting business counterparties;
• closely monitoring counterparty credit and performance;
• refinancing debt, reassigning bankers, or reconfiguring credit support as needed;
• tailoring debt offerings to meet investor demand; and
• prudent use of debt strategies such as variable rate debt that can reduce costs as market conditions permit.

In the next few years, we will face a series of complex challenges, but we must resist the temptation to unnecessarily borrow and hand the bill over to future generations.  We must continue to develop innovative, creative, and responsible solutions that will be fiscally prudent for our City’s long-term needs and goals.

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