The City of Chicago, Jefferson County, Ala., Riverside, Calif., and a school district north of San Diego have lost millions of dollars by using creative municipal finance, and if citizens around the country aren’t vigilant and outspoken, their city, county or school district may become the next victim of an unnecessarily complex bond deal, The Fiscal Times reported today. Perhaps the worst victim of municipal financial “innovation” was Jefferson County which filed for bankruptcy after its interest rate swaps blew up. After suffering a series of rating downgrades, the City of Chicago paid $270 million to close out swaps and convert its variable rate debt to fixed. Why bother with such complicated deals in the first place? Bankers who promoted interest rate swaps argued that municipal issuers would have lower interest costs overall by borrowing at variable rates. But fees banks collected for arranging the swaps offset these savings. Also, because bankers are more knowledgeable about swaps than politicians and government finance staffers, the terms and conditions of these deals often protected banks at the expense of borrowers.
