Well so much for the surplus in Buffalo’s budget, I wonder how Erie County is fairing? We have had an influx of sales taxes from Canadians so we have a surplus but this has to be digging into that too.

If we could only stop borrowing so frikin much and learn how to pay as we go… Never mind, I feel like a broken record, our politicos will never get it.

The annualized rate on $63 million of auction bonds the city of Buffalo, New York, sold in 2005 jumped 7.7 percentage points when a Feb. 14 auction failed, triggering the penalty rate of 11 percent proscribed in the terms of the deal. That’s almost 9 percentage points more than the floating rate it got from a swap with New York-based Citigroup Inc. Adding in the fixed rate of 3.17 percent, the city paid more than 12 percent that week.

“It hasn’t always been like that,” said Anthony Farina, executive assistant comptroller in Buffalo.

Before rates soared, Buffalo had about $400,000 saved because the variable interest on the swap exceeded its payments on the bonds, Farina said. That cushion is shrinking because in the week after the Feb. 14 auction, it paid $134,803 in interest on the bonds and received $26,753 from the agreement. The fixed- rate payment was $38,875.

New York Faces Double Whammy as Swaps Compound Failed Auctions

Feb. 28 (Bloomberg) — Local government officials from New York to Houston who followed the advice of their bankers and issued auction-rate bonds in combination with interest-rate swaps are now getting squeezed by both.

States, cities and hospitals across the country expected yields on the debt to move in tandem with benchmark rates when they bought swaps to protect against rising interest costs. Instead, the bonds’ rates are up an average 3.1 percentage points since September, while the one-month London interbank offered rate — what banks charge each other for funds — has dropped 2.7 points.

“It’s a universal problem,” said Debra Sloan, director of capital markets at Boston-based Partners Healthcare System Inc., which has interest-rate swaps on $450 million of its $600 million in auction securities. “We try to structure them so that over time there is a match.”

The failure of the financial instruments compounds the pain for borrowers stuck paying record-high interest on auction-rate debt billed as a cheap alternative to traditional bonds. Investors got skittish last year, retreating from auctions that determine new rates every seven to 35 days. Now UBS AG, Goldman Sachs Group Inc., and other brokers are refusing to be bidders of last resort, and the $330 billion market is frozen.

Municipalities and their taxpayers are paying for swap agreements that haven’t worked for months. (Excerpt) Read more —->

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