In public forums during the past several months, city officials have repeatedly said that Oakland signed a 1997 rate-swap agreement with Goldman Sachs in order to avoid the costs of rising interest rates. The swap, as previously reported, turned out to be a toxic deal that’s now costing the city $4 million a year. And city records and press reports show that the 1997 swap and one from 2003 didn’t just benefit Goldman Sachs at the expense of Oakland taxpayers, they also subsidized private corporations that did business with the city.
In 1997, Oakland’s Finance and Management Agency staff, working with employees of Goldman Sachs, designed the interest rate swap in order to free up $15 million to pay off a portion of the mounting debt associated with relocating the Raiders football team from Los Angeles. And in 2003, the city council agreed to restructure the interest-rate swap in order to obtain a $5.97 million “loan” from Goldman Sachs. Much of this money was used to subsidize Forest City Residential West, the politically connected corporation that built the Uptown Apartments.
These reasons for agreeing to the interest rate swap, and for later changing its terms, not only contradict recent claims made by Oakland’s Finance and Management Agency staff about the swap’s origins and purpose, it also flies in the face of the city’s current swap policy. While Oakland had no official swap policy in 1997 and 2003, the city’s policy from 2005 demands “prudent risk guidelines.” When the city modifies bonds with interest rate swaps, the policy states that it is “to produce debt service savings, [and/or] limit or hedge overall interest rate exposure.” Nowhere does it say that Oakland may use swaps to finance other debts or subsidize private companies. In their reports to the council this year about the swap, Finance and Management Agency staff members have never explained the swap’s original purpose, nor the reason it was restructured in 2003.
According to press reports from 1997, the council agreed to the interest rate swap with Goldman Sachs to help finance the Raiders’ return. To lure the Raiders back in 1995, the city issued roughly $200 million in bonds to refurbish the Coliseum. Some of these proceeds also went to fund a new training facility for the team, and $53.9 million went straight to the team as a “loan” — which the Raiders never repaid.
The scheme to repay the bonds, involving the sale of personal seat licenses for Raiders’ games, also didn’t pan out. And the fine print on the Coliseum bonds called for the city and Alameda County to make up for the shortfall with payments from their general funds. Faced with millions in yearly debt it owed on the bonds, the city agreed to the interest rate swap with Goldman Sachs in part because it produced a $15 million immediate payout that would be available in 1998 to pay the Coliseum debt, which includes the Raiders’ “loan.”
Finding this money was a tricky endeavor, requiring the city to refinance a different set of bonds using the risky swap, and then transfer the proceeds over. A report from the San Francisco Chronicle in 1997 indicates that Oakland’s leaders therefore chose a Goldman Sachs proposal to refund the city’s enormous pension obligation bonds. According to the Chronicle: “Although the county and city are stuck with big bills for the Coliseum this year, the money won’t be coming from their general funds. It will come from money they made in refinancing pension bonds last year.” The Chronicle went on to quote Councilman Ignacio De La Fuente, who explained that payments on the Coliseum bonds weren’t the worry of Oakland taxpayers. “It’s going to have nothing to do with our normal budget,” De La Fuente said at the time.
A 1997 article in Plansponsor, a trade publication focusing on pensions and finance, called it creative thinking. “The Oakland-Alameda POB was hatched after the city and county lured the Raiders back north from Los Angeles with a package that included a renovated stadium. When more than $30 million in cost overruns emerged from the refurbishing project, Alameda and Oakland had to come up with the money. Neither wanted to ask taxpayers to approve a bond issue. So both decided to use savings from refinancing their pension obligations to cover any extra costs.”
Current councilmembers who were there to approve the deal with De La Fuente include Jane Brunner, Nancy Nadel, and Larry Reid. They didn’t respond to requests for comment for this article, and documents dating back to 1997 are unavailable on the city’s legislative database.
Six years later, Oakland’s redevelopment authority was strapped for cash as it tried to patch together financing for the Uptown development, the jewel in Mayor Jerry Brown’s 10k plan. Under the terms of Oakland’s agreement with the developer, the city was responsible for purchasing the land and paying for infrastructure improvements in the Uptown project’s footprint. In order to raise several million dollars for this, Oakland agreed to a modification of the 1997 interest rate swap, changing the benchmark rate used to calculate Goldman Sachs’ obligation from the BMA Municipal Bond Index to 65 percent of the London Interbank Offered Rate, also known as LIBOR.
The council resolution approving the restructuring of the swap acknowledged that the new terms were riskier for Oakland: “As a result of the change in index the City will receive a payment from Goldman of an amount not less than $5,000,000 reflecting the change in market value for such revision to the Swap,” read the resolution. It continued, “the City finds that the money received from Goldman will partially compensate the City for assuming a possibly greater basis risk.” The Resolution practically earmarked the money: “the payments received by the City from Goldman can be used to finance capital redevelopment economic development projects.”
“The Council may not have gotten complete information about what they were voting on,” said former Councilman Wilson Riles Jr. about the 2003 swap restructuring. “Mayor Brown wanted the Uptown project bad as part of his 10k plan but the city did not have the money subsidy that the developer wanted.” Riles suspects that Mayor Brown and his staff crafted the swap revision and passed it by the council with a flood of other legislation.
The amended Exclusive Negotiating Agreement between Oakland and Forest City called for “utilization of the ‘bond swap’ proceeds, as authorized by the City Council on February 25, 2003.” A table accompanying the staff report on the agreement showed the city using $3.9 million in “Bond Swap Proceeds” to finance the Forest City Uptown project through the redevelopment agency.
Deborah Berman Santana of the Coalition to Stop Goldman Sachs said the news that the city used the swap to subsidize the Raiders and Forest City doesn’t invalidate the demand that Goldman Sachs terminate the deal at no cost to the city. Rather, she said, it now puts Brown and members of the council in the spotlight along with Goldman Sachs.