Miamidade Bond Costs Not Yet Rising Beyond Budget Margins
Written by Lou Ortiz on June 5, 2008
By Lou Ortiz
Fallout from volatility in the auction-rate market will cost Miami-Dade County an additional $16 million over the next 16 years on a single bond series of $139.7 million.
County Finance Director Rachel Baum said the Aviation Department bonds issued in 2003 were converted to a bank loan fixed-rate of 5.25%, until maturity in 2024.
The county had more than $1.24 billion in unstable markets, which included the aviation bonds.
The market crisis is being driven by problems with subprime mortgages and the tight credit that has ensued, but more so because of concerns over the insurers that back the municipal loans.
Other county bonds affected by the auction-rate market include $415 million for the Public Works Department issued in 1994; $46 million for the juvenile courthouse project in 2003; and two separate issues for capital asset acquisitions, one for $17.4 million in 2007 and another for $11.2 million in 2002.
The courthouse and assets bonds were issued as low as 3% to 3.3%, until the auctions failed, said Ms. Baum, who added that the county budgeted for interest rate fluctuations of up to 4.5% on the bonds when they were issued.
The asset acquisition bonds of $11 million will be converted to a fixed-rate of 4.10% and the other to 4.5%. "Now that we’re going to fix them, they’ll be about budget," she said.
Ms. Baum added that her office is still working to resolve the $46 million issue, which could end up being converted to a fixed rate.
In the commercial paper market, the county has $306 million in general loans and an additional $307 million in loans for the Port of Miami.
The commercial paper loans were obtained by Miami-Dade through the Sunshine State Governmental Financing Commission.
Ms. Baum said the commercial paper initially traded for 3.5% to 3.7%, but now ranges from 4% to 6%.
"We’re working with the Sunshine Commission to get another letter of credit provider to trade lower," she said. "By the end of March or early April we’ll have the bonds converted" to a lower rate.
Ms.Baum’s office is also working to convert the $415 million variable-rate bond for public works. The county is paying 6% interest on the bonds, which the finance office hopes to correct.
"We are looking at acquiring a new insurer and thus the bonds should trade" lower, below the current rate, she said.
Ms. Baum added that 90% of bonds the county issues are sold at fixed rates, ranging from 4.5% to 6%.
She added that, although the market has not stabilized, future issues, including those tied to the Building Better Communities General Obligation Bond program, probably will not be impacted.
"We anticipate 5%," she said about the interest rate on future general obligation program bonds.
"We can’t force a buyer to buy our securities at a rate that we decide we can afford," Ms. Baum said. "It’s very unfortunate we’re in a difficult market."
Financial Guaranty Insurance Co., whose rating was downgraded to A from triple A, was the insurer on the water and sewer bonds.
The county commission this month gave the finance office blanket authority to correct interest rate pricing on the bonds in order to move swiftly in the market and avoid further increases.
The resolution included a provision that requires Ms. Baum to provide a report that details the transactions.
The report will also include the increased annual debt payments and the impacts to the county’s general fund and to those of Miami International Airport, the Port of Miami and the Water and Sewer Department.
The problems began in late February in the auction-rate securities market, and then affected commercial paper and variable-rate bonds.
Governments use the commercial paper market as a low cost way to finance debt involving short-term, variable-rate instruments that are tax-exempt and mature in one to 270 days. The interest rate depends on the market conditions the day of sale.
Six of the loans are insured through CIFG Guaranty and four through Ambac.
Moody’s Investors Service placed CIFG’s Aaa rating on review for possible downgrade. Ambac has been placed on CreditWatch by Standard & Poor’s, which means a future downgrade is possible.
The auction-rate market auctions municipal and corporate bonds and preferred stocks. Interest rates are set every 7, 14, 28 or 35 days by short-term investors who bid and buy the bonds.
Municipalities are attracted to the market because interest rates are usually lower than fixed-rate borrowing.
Ambac is the insurer on the auction-rate securities.