SAN FRANCISCO - San Diego's electedcity attorney, Michael Aguirre, said he intends to block a city plan to borrow $103 million via a private placement because he believes the city's lease-purchase agreement for the bonds is illegal.
Aguirre said the bonds must be approved by voters because the lease is for city buildings but most of the money raised will be used for streets and sidewalks. He said state law requires a direct connection between the lease financing and the projects.
"The heart of my objection is that the proposed financing mechanism violates the debt-limit provisions of the city charter and state constitution," Aguirre said. "These provisions require that the city operate on a pay-as-you-go basis, absent a waiver approved by a two-thirds vote of the electorate."
The city's bond counsel and disclosure counsel disagreed, saying the structure of the leases is common in California. The City Council voted to approve the financing over the city attorney's objections. A spokesman for Mayor Jerry Sanders said the administration is trying to find a way to proceed without the Aguirre's approval.
"The transaction is perfectly legal and commonplace, and the city attorney knows it," Sanders told the council. "For the city attorney, this has become a political game."
Both Sanders and Aguirre are up for re-election, and their disagreements about the city's finances have become increasingly contentious in recent months. Both were elected after the pension disclosure scandal in the first half of the decade that led the Securities and Exchange Commission to charge five former officials with securities fraud earlier this month.
The city has been locked out of the public bond market since the pension scandal. Sanders and chief operating officer Jay Goldstone are pushing to reinstate the city's credit ratings from Standard & Poor's so that San Diego can reenter the public market later this year.
Standard & Poor's withdrew its AA-minus rating on the city in September 2004. Moody's Investors Service, which had rated San Diego Aa1 before the pension scandal, currently rates the city A3. Fitch Ratings last month revised its outlook to positive from negative on its BBB-plus rating. It rated the city AAA before the pension scandal.
Pending city council approval, San Diego plans to sell $102.6 million of lease-backed revenue bonds to Bank of America via a private placement the week of June 9, said Lakshmi Kommi, San Diego's debt manager.
Under the borrowing plan, the city will lease four public facilities, including its police department headquarters, to the San Diego Public Financing Authority for a nominal fee. The authority will issue bonds that will finance unrelated infrastructure improvements across the city, and the authority will lease the facilities back to the city for an amount equal to the debt service on the bonds.
"This is a legal transaction," said Arto Becker of Hawkins Delafield & Wood LLP, the city's bond counsel. "It is an often-used transaction in the state. They've been done for many years."
Kommi said the city authority plans to issue 10-year revenue bonds with a fixed rate of about 3.75% during the first two years. San Diego would pay interest, but not principal, on the bonds during the first two years. It would try to refinance the debt as 30-year lease-revenue bonds in the public bond market after the second year.
If San Diego could not refinance, the rate would be reset by a formula that includes an eight-year bond index and a spread of 2.25 percentage points. On April 21, the formula would have yielded a rate of 4.6%.
The City Council agreed to issue the bonds by a vote of seven to one. Aguirre issued a press release saying he remains opposed to the bond issue. He says the bond issue cannot go ahead without his approval.