Variable Interest Rates Hurt Some Munis

The national economic credit crunch is impacting public power agencies that have variable interest rate bonds. That includes the Modesto Irrigation District, which holds bonds that have interest rates that change weekly. Of Modesto’s debt, 11 percent, or $66 million, are “auction rate” bonds. The interest is determined in weekly auctions. Because of lack of buyers, Modesto’s monthly interest payments soared in mid February from $200,000 to about $304,000, said MID spokesperson Kate Hora. Munis often bundle up their debt and submit it to lending agencies singly or packaged with other public power agencies, pointed out Tony Braun, California Municipal Utilities Association attorney. In turn, the agency or agencies receive a mixed bag of securities, which may include fixed and variable terms. Of late, the variable bond interest rates have soared. “It’s an outgrowth of the credit crisis and has not affected anyone’s rates,” Braun said. The Modesto City Council voted March 5 to refinance its outstanding debt and replace the auction-rate securities with fixed-rate instruments. The bond repackaging is expected to take two to four months, and the “ultimate outcome unknown,” according to Hora. However, neither Modesto’s utility rates, nor the bond and credit ratings have or will be impacted, she added. The bonds at issue were secured in 2004. At the time they came with low interest rates and were considered “sensible and conservative,” Hora claimed.

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Variable Interest Rates Hurt Some Munis

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