Metropolitan Water District Has Paid Almost $88M to Get Out of Risky Swap Deals
The Metropolitan Water District of Southern California, a powerful regional agency that provides water to 19 million people, paid nearly $88 million to exit interest-rate swap deals, and still has a $71.5 million liability on the books. Such payouts and the liability that remains show Metropolitan got the raw end of the deals and lost.
By Ashly McGlone.
The agency that supplies water to most of Southern California has paid tens of millions of dollars since 2008 to exit risky and complex financial deals it made before the Great Recession hit.
The Metropolitan Water District of Southern California entered two dozen interest-rate swap deals, which, in a convoluted way, aimed to stabilize debt interest rates, but amount to bets on the way interest rates will go. If interest rates move one direction, the swap becomes an asset. If they move the other direction, it becomes a liability.
Metropolitan, a powerful Los Angeles-based agency that provides water to 19 million people across Southern California, paid nearly $88 million to exit interest-rate swap deals, and still has a $71.5 million swap liability on the books, records obtained through the California Public Records Act show.
Such payouts and the liability that remains show Metropolitan got the raw end of the deals and lost. Neither would have existed if interest rates had gone up, instead of down.
As part of a review of local public agencies that did swaps, Metropolitan’s swaps stood out because leaders there invested more heavily in them than the rest – tying nearly $2 billion in debt to swap contracts – and paid a heftier price for doing so when it wanted out of the losing deals.
Government officials’ appetite and tolerance for such risk-taking with public money has waned in recent years, but much of the damage was already done.
Since the Great Recession, swaps have cost public and private entities billions of dollars to exit. Unlike most traditional government debt, swap contracts typically cannot be renegotiated or refinanced. To get out, the losing side must pay the winning side the fair market value of the swap contract, which can be steep if terminated decades before it expires.