High Borrowing Fees Sock Calif. Taxpayers

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SACRAMENTO, CA — California’s need to borrow billions to handle its basic government expenses in a soured credit market is costing taxpayers millions of dollars in heightened bank fees.

State treasury figures reviewed by The Associated Press show California paid $11.5 million to dozens of banks and financial firms for selling a $5 billion short-term loan in October. In comparison, California paid $3.8 million in fees when it took out a $7 billion note last year.

Put another way, state taxpayers went from paying roughly $5.40 for every $10,000 borrowed to $23.

California will continue paying high bank fees in the months ahead because it needs billions more to cover basic operating expenses. The higher fees represent just a fraction of California’s $14.8 billion budget deficit this fiscal year but anger taxpayer advocates.

"Big banks seem to find a lot of ways to gouge the taxpayers," said Doug Heller of Consumer Watchdog, a Santa Monica, Calif.-based consumer advocacy group. "Between overcharging us for their bank work and then asking for free money in the form of massive bailouts, it’s like they’re getting us coming and going."

The banks that charged California the most for selling bonds last fall, Bank of America and Goldman Sachs, declined to respond when asked to comment on their fee structures.

Government bonds are harder to sell these days, in large part because institutional investors rocked by plummeting investments tied to the housing industry have fled the market. That has left many state governments paying more to find individual investors who will loan them money and searching sometimes in vain for investors willing to buy.

Banks act as middlemen of sorts, trying to find investors willing to buy municipal bonds. Fees have gone up as that has become harder.

California is hit hardest by the rising costs in the bond market for two reasons: its issues are so much larger than other states (in the multi-billions of dollars); and it has come to rely on borrowing money each year to pay its day-to-day operating expenses until most income tax receipts arrive in the spring. That leaves the state no choice but to wade into the bond market at a turbulent time.

Nevertheless, other states and public entities are not immune to the tighter credit market for municipal bonds.

The New York-New Jersey Port Authority received no bids when it offered a competitive sale of $300 million in short-term notes in early December. The state of New York halted a $161 million general obligation bond offering in September, and this month Louisiana postponed a $185 million bond for the state’s technical and community college campuses while it waits for the market to stabilize.

"New York will continue to have a strong credit (rating), but at the same time we are seeing a change in demand for bonds. Rates are up and there’s volatility," said Jim Fuches, a spokesman for the New York state controller’s office.

Municipal borrowing has contracted across the country, said Matt Fabian of Municipal Market Advisors, based in Concord, Mass. He estimated that infrastructure projects worth between $100 billion and $125 billion have been postponed this year.

Unable to find good deals in the private credit market, some state leaders have asked for federal assistance to help pay for public works projects. The National Association of Governors recently suggested that President-elect Barack Obama cover $136 billion in infrastructure projects such as road and bridge repairs when he takes office next month.

"It makes a great deal of economic sense to provide economic stimulus so all layers of government are working in concert to get the economy going again," said Jeff Esser, executive director of the Government Finance Officers Association.

Earlier this month, a state investment board halted lending for about 2,000 public works projects in California worth more than $16 billion because the state could not afford to fund them.

State finance officials say California will not be able to take out bonds to restart the projects until lawmakers and Gov. Arnold Schwarzenegger agree on a plan to tackle the state’s growing deficit, projected to hit $42 billion over the next 18 months.

Taxpayer groups blame lawmakers’ inaction and banks for adding to the public’s burden as California’s budget morass drags on. The most the state paid in short-term loans during the past five years had been $3.8 million in 2004.

But California’s situation is uniquely difficult. As home to the world’s eighth largest economy, no other state comes close to the amount of cash California borrows.

In October, individual sales helped California raise $5 billion to pay its operating costs. Schwarzenegger even went on air in San Francisco and Los Angeles encouraging people to buy the notes. Without the money, the state would have run out of cash at the end of that month.

Tom Dresslar, a spokesman for the state treasurer’s office, defended the state’s decision to pay the higher bank fees to secure the operating bonds.
"We were facing a situation of running out of cash and not being able to make payments," he said. "We had a market that was virtually frozen, particularly on the institutional side. We knew in order to make it work, we had to rely on retail. That is a labor-intensive endeavor."

Without as many banks, insurance companies and hedge funds buying, the state structured the bond sale differently by having more firms selling directly to investors.

Bank of America collected $2.4 million in sales fees, Goldman Sachs $1.3 million and Morgan Stanley more than $900,000. Merrill Lynch and Citigroup rounded out the top five as nearly 50 firms participated in the sale.

The figures include a $400,000 management fee paid to each Bank of America and Goldman Sachs for leading the sale. When contacted by phone and e-mail, representatives of both banks said they would decline comment because they don’t discuss fee structures.

California also paid a slightly higher interest rate, in addition to the boost in fees. For the $5 billion transaction last fall, the state has committed to paying a rate of up to 4.25 percent, compared to 3.37 percent on bonds sold in 2007.

In the meantime, state Treasurer Bill Lockyer has halted additional cash borrowing, including a $750 million general obligation bond.

If lawmakers pass a midyear budget fix soon, the treasurer’s office would go back to the bond market. Dresslar, Lockyer’s spokesman, said higher bank fees and interest rates should perhaps be one of the least of the state’s worries given the scope of its budget problems.

Consumer Watchdog
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