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Over $100 Million Saved: $10 Million This Fiscal Year by CFO Debt Management Strategy

Tuesday, May 27, 2008
Chief Financial Officer Natwar M. Gandhi today announced that the city is significantly reducing the interest it is paying on more than $800 million of General Obligation and Ballpark Revenue bonds.

(Washington, DC)  – Chief Financial Officer Natwar M. Gandhi today announced that the city is significantly reducing the interest it is paying on more than $800 million of General Obligation and Ballpark Revenue bonds. These variable-rate bonds were previously marketed in the form of auction rate securities and variable-rate demand obligations, which have saved the city more than $100 million, including $10 million in fiscal year 2008.

On May 23, the Office of the Chief Financial Officer completed the conversion to lower interest bonds. These auction rate securities and variable-rate demand obligations originally provided significant saving to the city, but their interest costs have risen sharply in recent months.

Gandhi said, "Using variable-rate bonds instead of fixed-rate securities has allowed the city to save taxpayers more than $100 million in interest payments over the past seven years. 

"For fiscal year 2008, despite the temporary increase in rates, the city will still save approximately $10 million compared to fixed-rate bonds," Gandhi added.

The conversion of District variable-rate bonds (both auction rate securities and variable-rate demand obligations) backed by bond insurers to variable-rate demand obligations backed by letters of credit has been underway since February.  The interest rates on the new bonds average 1.7 percent compared to an average of approximately 5 percent on the old securities for the past several months.

Municipal variable-rate bonds (both auction rate securities and variable-rate demand obligations) typically are approximately two percentage points (or 200 basis points) less expensive for the issuer/borrower than fixed-rate bonds. Auction rate securities and variable-rate demand obligations were sold using bond insurance as a credit enhancement.

The unprecedented downgrade of bond insurers by the rating agencies had a major impact on the market for these instruments, including reduced investor security and investor demand for these bonds.

"In addition to the low interest rates, variable-rate bonds offer another crucial benefit to issuers," said Lasana Mack, treasurer for the District of Columbia. "They can be converted at any time, without penalty, to another type of debt instrument, which is what we did to secure the lowest possible interest rate."

Mack said the conversion occurred in three phases:

  • May 14: $252.4 million of insured variable-rate demand obligations was converted to variable-rate demand obligations backed by letters of credit. 
  • May 21: Approximately $525 million of insured auction rate securities was converted to variable-rate demand obligations backed by letters of credit.
  • May 23: Approximately $24.2 million of insured auction rate securities was converted to variable-rate demand obligations backed by letters of credit.  

The banks issuing the letters of credit are JPMorgan Chase, Bank of America, Allied Irish Bank, and Dexia.