Friday we shared this national financial story from Bloomberg.com in which Redding, and many other cities and organizations, were mentioned as victims of the auction-rate bond market’s meltdown:

“… Redding, California, expects to pay Citigroup $6.7 million to close out a swap on $67.3 million of auction-rate bonds it sold, said Tom Graves, financial manager of the city’s electric system, the recipient of the proceeds. . . .

It refinanced the bonds on April 28, selling fixed-rate debt because it was concerned variable rates in the municipal market might shoot up again, he said. . . .

“It was a very good alternative while it worked,” Graves said in reference to the use of auction bonds combined with fixed-rate swaps. “Our feeling was that there was still uncertainty in the marketplace that hadn’t been resolved.”

That same morning I e-mailed Kurt Starman, Redding’s city manager, and invited him to answer a few questions to help us better understand this complex story.  I also requested a summary of Redding Electric Utility’s investment portfolio. Within a few hours he’d sent REU’s debt information, which you can read by clicking here. He also answered the following questions:

What is your reaction to REU’s $6.7 million penalty?

“The Redding Electric Utility (REU) essentially had two fundamental choices:  It could maintain the auction rate bonds and continue to pay a premium due to the market failure described in the Bloomberg story, or it could refinance the debt at a fixed rate.  To be candid, I think that it is outrageous that the REU must pay a fee to terminate the auction rate bonds.  With that said, however, it is more cost effective to refinance the debt and secure a fixed rate for the duration of the bonds.  Ultimately, this decision will better serve the community.  The good news is that the REU received an A+ credit rating.  Consequently, REU was able to secure very competitive interest rates.”

Was it (the fee) expected?

“The REU was aware of the termination payment when it made the decision to refinance the bonds.  This payment was included in the cost-benefit analysis.”

Where will the money to pay this penalty come from?

“The termination payment was included in the refinancing referenced above.” 

Note from Doni: REU refinanced the auction-rate bond debt on April 28. Escrow is scheduled to close May 15.

My thanks to Kurt Starman and city of Redding staff for their help, transparency and accessibility with regard to this story.