Last month's City Council meeting in which dozens of activist packed the chambers to demand action on the city's toxic interest rate swap deal with Goldman Sachs seems to have lit a fire under the council and administration. On February 23, the Rules and Legislative Committee tasked Administrator Deanna Santana's office with drafting a full report on the deal with Goldman Sachs, including recommendations for action. The council has scheduled April 24's Finance Committee meeting to be a discussion of options, including ways to terminate the deal.
On March 2, Assistant City Administrator Scott Johnson sent a memo to Mayor Quan and the Council to answer frequently asked questions about the rate swap. The memo contains several new pieces of information not previously reported (see our previous coverage of the swap deal).
First, the memo confirms what community activists have been saying; the city has been paying upwards of $5 million yearly to Goldman Sachs under the arrangement. Johnson does not give a detailed breakdown of payments over the last four years, but does go on to explain that these funds are specifically drawn from two sources within the city's budget. The first source of funds is through a parcel tax authorized by Measures R and O. The second source is from proceeds of an annuity purchased by bonds originally issued in 1985. That annuity's other function is to make payments into the city's under-funded Police and Fire Retirement System pension fund.
Johnson's memo also claims that Oakland has actually realized more than $9.1 million in savings from the swap deal. But the specific means by which these savings were achieved, according to the memo, were all realized far long before the economic meltdown in 2008. Since then, the interest rate swap has been a major drain on Oakland's finances.
Schaaf is referring to the Federal Reserve's decision to keep interest rates at historic low levels, a policy that forces Oakland to pay millions under the terms of the deal with Goldman Sachs. "It's frustrating because it's not our fault," said Schaaf. "Under normal circumstances it wouldn't have turned into a bad deal."
Schaaf hopes there is some action at the federal level to relieve cities like Oakland of these onerous obligations. "Second, it bothers me that Oakland didn't get out of this deal sooner, when we had the money to," she added.
Schaaf's point calls into question the supposed "savings" that the interest rate swap has produced over time. Even if the deal has had a net positive impact on Oakland's finances since 1997, the fact remains that it is precisely now during the city's worst budget crisis in decades that the swap is costing the city millions yearly, just when revenues have bottomed out. "I think we could have avoided additional years under this deal had we acted sooner," said Schaaf. Instead the city must make costly payments exactly when it can least afford to.
In the run up to the release of the administrator's full report on the swap, and April's council meeting to mull over options, activists are hard at work brainstorming ideas for how to terminate the swap deal on favorable terms for the city. Some have pointed to the example of the Asian Art Museum across the Bay. San Francisco and the foundation that runs the museum were able to bring JP Morgan Chase to the table and negotiate a termination of a costly rate swap that was draining the museum's budget. Skeptics say, however, that's because JP Morgan was the guarantor for the museum's debt, and had the swap contributed to a default, the bank would have lost money. On first glance, Goldman Sachs doesn't appear to have such an interest in Oakland's fiscal health.
An analysis of Oakland's bond issuances reveals, however, that Goldman Sachs has a considerable interest in maintaining a friendly business relationship with Oakland. Since 1989, Oakland has selected Goldman Sachs to underwrite at least a half billion in city debt. As underwriter to this debt, Goldman Sachs was allowed to make millions in profits from upfront fees as well as the discount — the difference between the price Goldman purchases the bonds from the city, and the price Goldman re-sells the bonds to third-party investors.
Councilwoman Schaaf, Jason Overman of Councilwoman Rebecca Kaplan's office, and Assistant City Administrator Johnson each confirm that the city is in communication with Goldman Sachs about the rate swap. But until the administrator's office releases its report on the swap, it's unclear just what options the city's leaders will be able to choose from in order to address the problem. Activists, meanwhile, say they are planning further action to educate the public about the issue, and to press the city's leaders to get bold and creative.