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SANDAG Bet Against Big Banks — and Taxpayers Are on the Hook for Millions

• Interest-rate swaps cost public agencies millions of dollars. Now they’ve largely disappeared in the public sector.

• Many agencies have paid money to get out of swaps deals. SANDAG, however, has kept the bulk of its swaps – with their outsized monthly payments to banks on top of debt payments to actual bondholders – even as money runs dry for new projects.

It was 2005, and the recession hadn’t hit yet. Most taxpayers didn’t have opinions on financial derivatives. Few imagined major banks could ever go belly up. Even government agencies began drinking the Kool-Aid.

The San Diego Association of Governments was no different. Looking to maximize the possibilities for TransNet, its newly passed sales tax measure, the public agency did what others were doing: It played around with sophisticated financial arrangements that few understood.

SANDAG bet big that interest rates would go up. Instead, rates went down and stayed down – they’re still down. That unforeseen event – persistent and historically low interest rates – cost the agency millions.

As a result, SANDAG now has a roughly $100 million liability hanging over its head. It’s already spent $3.5 million out of pocket that it didn’t anticipate. And it spent $22 million to get out of a portion of its bad bet using borrowed money that will end up costing $42.5 million to repay.

Tim Holler