Public Comment

Ever since the housing collapse the news outlets have been telling us about the bad behavior of people who refinance their mortgages and then take out a larger mortgage at a lower interest rate and take the difference in cash and go on a vacation.  

This behavior has contributed to the underwater housing problem and is currently frowned upon. 

The Administration of the City of Berkeley , with the complicity of a City Council that I am sure doesn't understand, apparently doesn't believe that such behavior will lead to a fiscal problem. Since interest rates have been falling the City has done what appears to be a prudent thing-it has been refinancing it's outstanding Bonds and Certificates of Participation (COP's). 

For illustration purposes let's say the City has a 30 year Ten Million dollar bond issue outstanding with 25 years to maturity. The interest rate is 5%. The City negotiates to issue a new 30 year Twelve Million Dollar Bond and will use the proceeds to pay off the original Ten Million Dollar bond and will take the additional Two Million it now has borrowed and puts it in an account to pay PERS retirement demands for the employee retirement fund. Ever since the housing collapse the news outlets have been telling us about the bad behavior of people who refinance their mortgages and then take out a larger mortgage at a lower interest rate and take the difference in cash and go on a vacation.  

This behavior has contributed to the underwater housing problem and is currently frowned upon. 

The Administration of the City of Berkeley , with the complicity of a City Council that I am sure doesn't understand, apparently doesn't believe that such behavior will lead to a fiscal problem. Since interest rates have been falling the City has done what appears to be a prudent thing-it has been refinancing it's outstanding Bonds and Certificates of Participation (COP's). 

For illustration purposes let's say the City has a 30 year Ten Million dollar bond issue outstanding with 25 years to maturity. The interest rate is 5%. The City negotiates to issue a new 30 year Twelve Million Dollar Bond and will use the proceeds to pay off the original Ten Million Dollar bond and will take the additional Two Million it now has borrowed and puts it in an account to pay PERS retirement demands for the employee retirement fund. 

The City makes sure that the taxes levied to support the Ten Million dollar Bond issue will be sufficient to pay the amortized amounts on the new Twelve Million Dollar bond. The city reasons that the tax paying citizens aren't out anything because they voted for the initial bond and their assessed rate will remain the same. The employees are better off because there is Two Million more in their PERS retirement account. The Council will later think the retirement money demanded by PERS isn't so unaffordable because it has been reduced by the Two million painlessly received from refinancing which the Council has long since forgotten about. 

The city could have reduced the amount owed on the TEN MILLION dollar original issue bond by the two million dollars it received; or it could have put two million into street repair; or the city could also have recalculated the tax rate required to pay the balance due on the bond issue with the new lower interest rate-thus lowering the real property tax bill for all property owners. 

The city has reaped over $14 million dollars in this refinancing scheme during the past several years and not one dime of it has gone to the benefit of tax paying citizens. It has all gone for the benefit of employees similar to the utility tax windfall of several years age. 

This behavior by the City was illustrated about a decade ago when Enron and others raised the electric rates for all citizens of California. The cities reaped a windfall because of the utility users tax proceeds which increased dramatically. Most cities elected at the time to refund the excess tax collected to its citizens on a pro rata basis. Berkeley reasoned that the City's electric bill went up so the excess utility user tax should be used to pay the City's utility bill. Of course the tax proceeds far exceeded the increase in the City's bill. 

The city had the option to lower the assessment rate the taxpaying citizens are subjected to and thus lower their tax bill. The City Fathers and Mothers are always on the side of the employees and against the citizens who they continuously ask to support new bond measures. 

The City makes sure that the taxes levied to support the Ten Million dollar Bond issue will be sufficient to pay the amortized amounts on the new Twelve Million Dollar bond. The city reasons that the tax paying citizens aren't out anything because they voted for the initial bond and their assessed rate will remain the same. The employees are better off because there is Two Million more in their PERS retirement account. The Council will later think the retirement money demanded by PERS isn't so unaffordable because it has been reduced by the Two million painlessly received from refinancing which the Council has long since forgotten about. 

The city could have reduced the amount owed on the TEN MILLION dollar original issue bond by the two million dollars it received. It could have put the money into street repair.  

The city has reaped over $14 million dollars in this refinancing scheme during the past several years and not one dime of it has gone to the benefit of tax paying citizens. It has all gone for the benefit of employees. 

This behavior by the City was illustrated about a decade ago when Enron and others raised the electric rates for all citizens of California. The cities reaped a windfall because of the utility users tax proceeds which increased dramatically. Most cities elected at the time to refund the excess tax collected to its citizens on a pro rata basis. Berkeley reasoned that the City's electric bill went up so the excess utility user tax should be used to pay the City's utility bill. Of course the tax proceeds far exceeded the increase in the City's bill. 

The city had the option to lower the assessment rate the taxpaying citizens are subjected to and thus lower their tax bill. The City Fathers and Mothers are always on the side of the employees and against the citizens who they continuously ask to support new bond measures. 

This kind of behavior brought about the housing crisis and it will bring about a fiscal city crisis. 

This behavior by the City was illustrated about a decade ago when Enron and others raised the electric rates for all citizens of California. The cities reaped a windfall because of the utility users tax proceeds which increased dramatically. Most cities elected at the time to refund the excess tax collected to its citizens on a pro rata basis. Berkeley reasoned that the City's electric bill went up so the excess utility user tax should be used to pay the City's utility bill. Of course the tax proceeds far exceeded the increase in the City's bill. 

The city had the option to lower the assessment rate the taxpaying citizens are subjected to and thus lower their tax bill. The City Fathers and Mothers are always on the side of the employees and against the citizens who they continuously ask to support new bond measures. 

This kind of behavior brought about the housing crisis and it will bring about a fiscal city crisis. 

Ted R. Edlin tredlin@yaahoo.com