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Cost of State's Energy Loan Getting Higher
Budget: Interest rate is rising on $4.3-billion "bridge" financing. Treasurer Angelides is paying political price.
By MIGUEL BUSTILLO Times Staff Writer
October 31 2001
SACRAMENTO -- A $4.3-billion loan California took out this summer to help cover the costs of the energy crisis is turning into an expensive deal for state taxpayers--and a political problem for the elected official who brokered it, Treasurer Phil Angelides.
Four months after California borrowed the money to help finance the state's foray into the electricity business, squabbling state officials still have not agreed on a plan to pay it back. Only the largess of the lenders, who allowed a key deadline to pass earlier this month, has prevented California from defaulting on the massive obligation, a failure that would carry damaging consequences on Wall Street.
But the breaks apparently end there. In negotiations with state officials, the team of banks led by JP Morgan Chase & Co. has refused to give any ground on a series of dramatically escalating interest rates and other financial penalties it built into the deal.
If another deadline passes today without progress--and Angelides indicated Tuesday that it would--California will be forced to begin making huge quarterly payments of $390 million to the lenders, just as the state struggles with a looming multibillion-dollar budget deficit. The state will have to make the payments for the next three years, or until it fully repays the loan, in 11 installments starting next April.
Making matters worse for California, the interest will jump from roughly 4% to the prime rate, costing taxpayers tens of millions more. At the current 5.5% prime rate, the minimum interest on the loan would total $236.5 million. If the loan is not repaid by May, the interest kicks up again, to 1% above the prime rate. And if it is not repaid by next October, it rises further, to two points above prime, which would be 7.5% at the current rate. The state will have to pay the interest in quarterly installments.
Additionally, California has to pay the banks a 2% penalty fee, estimated at $235,000 a day, since missing the Oct. 10 deadline to have a method of payment in place. That penalty, which has cost the state $4.9 million through Tuesday, stops accumulating as soon as the state approves a plan to sell $12.5 billion in energy bonds, the financing that was intended to pay off the loan.
And if it fails to meet tonight's deadline, as expected, it will also have to pay another round of upfront fees to the bankers: $5.37 million on top of the $5.37 million they were awarded at the outset.
Angelides has been publicly advocating strategies to solve the state's energy problems since the crisis first flared up in January, and was outspoken last spring about the need for a short-term loan to cover power costs. But as the deal he negotiated has soured, the treasurer has become more withdrawn from the process.
When reporters called Angelides' office earlier this month to ask about details of the loan renegotiations, treasurer's officials referred them to the Davis administration and the California Department of Water Resources, the state agency buying electricity. The treasurer's office was leading the renegotiation talks, according to other state officials.
In an interview Tuesday, however, Angelides took full responsibility for the loan deal and defended it, saying it had met its intended goal of shielding the state budget from the drain of electricity costs. Before securing the loan, the state had been buying electricity straight out of its general fund as an emergency measure to avert mass blackouts.
"We're lucky we did this loan, particularly given what we know now about the state of the general fund," Angelides said, referring to California's projected budget deficit of $8 billion to $14 billion. "The day this loan was made, the general fund bleeding stopped."
Republicans See Political Opportunity, Vindication
Despite Angelides' new, lower profile, California Republicans have noticed his role in the troubled loan and the other financial fallout from the energy crisis. There is now talk in GOP circles of fielding a candidate to challenge the Democratic treasurer, who was not expected to face serious Republican opposition in next year's elections.
Angelides said he was unconcerned.
"I'm not worried about the personal political consequences, I'm really not," he said. "What I am most worried about is the old people who are going to have services taken from them" and the other public services that could be affected if the loan, and the state budget, are not repaid soon.
For Republicans in the Legislature, particularly in the Assembly, the problems the loan deal has encountered serve as sweet vindication for a hard-line stance they took this spring that turned into a public relations disaster.
GOP lawmakers refused in May to help give Angelides the two-thirds vote he needed to secure the bridge loan. They called it "a bridge to nowhere," arguing that the $12.5-billion bond deal that was supposed to repay the loan, and the state's entire plan to get through the crisis, was full of uncertainty.
Democrats slammed the Republicans as obstructionists, and accused them of threatening funding for education and other vital public needs by placing the state's fiscal future in danger. Editorials everywhere sided with the Democrats, but the Republicans--and Democratic state Controller Kathleen Connell, who sided with the GOP legislators--stuck to their positions. Ultimately, Gov. Gray Davis had to issue an extraordinary executive order to authorize the loan deal.
"You know what? We're still not there. There are still questions" about the energy bond deal, said Assemblyman Keith Richman (R-Northridge).
"This has been a series of fiascoes," Richman added. "I hate to keep saying this, but if these questions we had brought up in May had been taken seriously, we would not be in the situation we are now."
Indeed, the bond deal that was supposed to pay off the loan has yet to get off the ground, caught in a power struggle between the Davis administration and the Public Utilities Commission over how to handle the financial aftereffects of the crisis. Angelides has announced that the bond deal, initially expected to take place last spring, will now have to wait until next year because of the dispute.
The bonds are supposed to be repaid by utility customers out of their monthly bills. But the commission, which regulates electricity rates, has refused to approve an order the state needs to pass its power costs through to utility customers and let the bond deal move forward.
Bond Deal Impasse Adds to Uncertainty
Utilities commission President Loretta Lynch wants the Davis administration to renegotiate some of the long-term electricity contracts the state signed this year to stabilize the state's power supply. The Davis administration initially said it was too late to revisit the contracts, but recently acknowledged that it has begun reviewing the deals and will try to rework some of them. But the impasse continues.
If the state lets the bonds go forward under its current plans, Lynch said, it will set the deals in stone.
She supports legislation that would essentially allow the bond sale to proceed while officials redid the power contracts, which she views as a bad deal for consumers. But Davis has indicated he will veto the bill, which was approved by lawmakers, if it reaches his desk.
Angelides maintains that if the bond deal had not become a political football, his plan for the loan would not have encountered problems. But critics, including Connell and Lynch, argue that the treasurer's timetable for repaying the financing was unrealistic from the start.
Connell, who said she tried to talk Angelides out of the loan this spring, was critical again Tuesday, saying her fears were coming to pass.
"There have been three serious mistakes that have cascaded on one another, and the three together have resulted in a fiscal meltdown," Connell said, referring to the state's decision to buy electricity with taxpayer money, enter into long-term contracts at the peak of the crisis, and finance it all with the loan and bonds.
"It's an unfortunate situation to have the state in. We are sandwiched between high-priced long-term contracts for more electricity than we need, and an interim loan with interest higher than the market is now charging."
-- Martin Thompson (email@example.com), October 31, 2001
In May 2001, I predicted insolvency and a form of reorganization type bankruptcy for the State of California. Despite an extreme best-case scenario outcome for the technical Y2K+1 driven crisis (conservation, weather, power plant breakdowns, and blackouts); this remains a distinct possibility, with the rapidly deteriorating Economy.
-- Robert Riggs (firstname.lastname@example.org), October 31, 2001.
I doubt California will go bankrupt. The legislature yesterday passed a bill to increase the statae sales tax. "We have the means to raise money when needed."
-- PHO (email@example.com), November 01, 2001.