Credit crunch, delay add $1 million to Erie County's loan cost
Timing combined with the credit-market collapse has cost Erie County $1 million. And the county is one of the lucky ones. It was still able to borrow the money it desperately needs to pay its bills.
Governments, schools and hospitals around the country tried to borrow a total $6 billion last week by selling bonds on Wall Street. The sale of all but $100 million was postponed until calmer days.
County Comptroller Mark C. Poloncarz said that when he and the state-appointed control board shopped around about a month ago for a one-year bridge loan, they were quoted rates of about 1.6 percent.
Had the county been able to borrow the $75 million immediately, its interest costs would have amounted to $1.2 million. For assorted reasons, the government wasn’t quite ready.
When Poloncarz asked the control board in mid-September to approve his deal, the board put him off. The board was about to gain County Legislature approval to close the loan itself and supplant Poloncarz as the county’s borrower.
Now, the timing apparently could not have been worse. With credit clouds darkening, the control board learned last week that market complications left it unable to borrow the $75 million on Wall Street.
The board had little choice but to turn to Poloncarz to quickly activate another just-in-case transaction he had set up with Bank of America. The bank will lend Erie County $75 million without involving Wall Street underwriters or investors. But “private-placement” interest rates generally run higher than those offered by competing underwriters.
Bank of America’s rate of 2.99 percent is eight-tenths of a percent higher than comparable Wall Street rates for one-year loans. And the 2.99 percent will cost the county a full $1 million more in repayment costs compared with the 1.6 percent quoted weeks ago.
Either way, most county officials are happy with the deal because their backs are to the wall. The county must have $75 million by today to meet the end-of-the-week payroll and next month’s bills.
Robert Glaser, control board chairman, told Poloncarz on Monday he had done “a nice job” in keeping another option open.
“I don’t want people to think we got a bad rate,” Poloncarz said. “It’s higher than what we could have paid a few weeks ago, but it’s lower than what we have paid in the past.”
For local governments, the credit crisis is just beginning.
“The meltdown on Wall Street is going to affect us big, big time,” County Budget Director Gregory Gach said.
The control board had expected its underwriter, Roosevelt & Cross, to buy any of the short-term revenue anticipation notes it could not sell to investors. But at some point Thursday, Roosevelt & Cross no longer could give that assurance.
The Erie County Fiscal Stability Authority, as the control board is formally known, met briefly Monday to approve closing the Bank of America deal, then went behind closed doors to discuss potential action against Roosevelt & Cross.
The county’s loan for major projects remains in limbo. It cannot be obtained through a private transaction; the county will need to sell bonds through an underwriter on Wall Street.
