City loan hinged on guarantee

While the University negotiated with the city over several points in the $43.4 million loan deal settled last week, the key factor for the University to participate was how the loan would be secured, Treasurer Scott Lederman said Friday. The University agreed to loan the city $10 million to help ease pressure on the city's coffers only after final details were hammered out -- including a plan to ensure repayment of the loan, Lederman said. The security which the city offered to prospective lenders, the University and other local enterprises, is almost identical to a deal last year in which a group of local institutions advanced the city their taxes. Thirteen other institutions along with the University agreed last week to loan the city $43.4 million -- less than half what City Finance Director David Brenner anticipated at the beginning of negotiations. If the city does not pay back part or all of the loan, the University does not have to pay the equivalent amount in wage taxes. Last year, University agreed to prepay the city the same amount it is loaning this year, $10 million, in wage taxes. "When it was presented to us . . . we looked at the security," he said, adding that once the loan looked "very secure" administrators were "satisfied this was acceptable." But unlike last year's agreement, the University stands to earn betweeen $425,000 and $450,000 in interest, Lederman said. The University is charging 8.5 percent interest on the loan. While the interest is higher than interest earned from other investments, Lederman said the University is charging the high rate because the city is a high-risk investment. He added that the University, the largest participant in the loan, did not go into the deal soley to make money. He said the administration wants the city to be able to pay its debts. "It's a way to help the city . . . meet its payroll," Lederman said. Lederman emphasized that the money from the loan comes from the working capital of the University and would have been placed in other short-term investments had it not been loaned to the city. He added the city would either give the city a check for the amount or wire-transfer the money into an account specified by the city. Lederman said it was not unusual that some institutions decided not to participate in the loan, causing the original deal to shrink by half. "When people go through the [negotiations], some fell out," Lederman said. "It's not completely surprising." While administrators have discussed the possibility of loaning the city money every fall with the Board of Trustees, Lederman said he hopes the city will be able to borrow money through Wall Street investment firms in the future. The state established a financial oversight authority to borrow money in traditional markets on the city's behalf. But the board has refused to borrow money for the city until it approves a five-year financial plan and grants the state oversight of negotiations with municipal unions. The oversight board took no official stance on the loan proposal, but City Controller Jonathan Saidel said he opposed the loan because it allowed the city to avoid making decisions on its financial future. But Lederman said the city's attempts to borrow money are not unusual -- only the lenders are. "This is sort of a routine transaction, although it's gotten a lot of publicity," Lederman said.

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