BRADENTON, Fla. — The Orlando-Orange County Expressway Authority is under fire from Orange County Mayor Teresa Jacobs for what she describes as an aggressive financing structure that backfired.
Jacobs, who took office in January and sits on the authority’s board, has called for the central Florida agency’s director to resign.
A day after Moody’s Investors Service downgraded the OOCEA’s bonds to A2 from A1 last week, Jacobs released a critical 165-page review of the agency’s use of “a billion dollars of risky derivative and variable-rate debt.”
Jacobs said in a memo to the board chairman Wednesday that she was not told the truth by the authority’s long-time executive director, Mike Snyder, about how and why decisions were made to sell $1 billion of variable-rate debt in 2002 and 2005.
She also raised questions about the reasons for a toll increase several years ago, as well as planned toll hikes in the future — issues she has raised a number of times since becoming a board member.
The Expressway Authority this year embarked on restructuring some of the debt.
Earlier this year, the agency sold $290 million of refunding revenue bonds to take out variable-rate demand bonds, and will soon remarket $408 million to eliminate enhancement from troubled Dexia Group and replace it with new letters of credit.
Though the OOCEA has suffered problems as a result of the credit market meltdown, and lighter traffic due to the recession, the downgrade by Moody’s was in line with the A ratings of Fitch Ratings and Standard & Poor’s.
Snyder does not intend to resign, Expressway Authority spokeswoman Lindsay Hodges said Friday. He is appointed by the board.
“The authority went through an extensive process of evaluating the various financing structures for the 2003 and 2005 bonds, including the one actually approved by the board,” Hodges said.
“Ultimately, OOCEA’s board weighed the pros and cons of the various alternatives and chose to execute what, at the time, was considered to be a rather conservative approach — access the short end of the yield curve through variable-rate bonds and swap the variable rate with BMA-based interest rate exchange agreements,” Hodges said. “This provided lower cost of capital in comparison to the estimated fixed-rate [debt] and mitigated many of the perceived risks.”
Jacobs contends those decisions resulted in “millions of dollars of added expenses to our toll payers, hundreds of millions of dollars of mark-to-market losses, and threats of ratings downgrades which forced a huge toll increase in the middle of the worst recession in many decades.”
Jacobs’ memo said that she was misled by Snyder, who told her that decisions about the plan of finance were based on the advice of the agency’s financial advisor since 2002, First Southwest Co., and that the use of variable-rate debt and swaps was commonplace at the time.
She was also told that the “board could not have predicted the potential risk,” presumably as a result of the market meltdown, though the memo is not specific on that point.
There were numerous warnings throughout the decision-making process of all the risks associated with entering into derivatives, according to Jacobs.
“Everybody was not doing it,” she said, noting neither Orange County nor the city of Orlando used swaps.
Jacobs also alleged in her memo that First Southwest “recommended against using such risky financing mechanisms” during a committee meeting earlier this year. She has asked for the issue to be discussed at the board’s Nov. 14 meeting.
“We strongly disagree with the mayor’s comments and report, and we look forward to responding at the OOCEA’s Nov. 14 board meeting,” First Southwest said in a statement Friday.
Hodges said that the financial advisor presented a financial analysis of the transactions and “thorough discussion of the perceived risks” of the deals, which were approved by a former board.
Jacobs’ report did not document any recommendation made by First Southwest for or against the deals, she added. “Similar and even less conservative strategies were employed by local issuers and other issuers all over the country.”
Jacobs, who is a former Orange County commissioner, could not be reached by press time for further comment.