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City's water system debt costs soar

City Hall is feeling the effects of Wall Street's financial roller coaster. Borrowing costs in city water system debt have spiked in the past three weeks, saddling Buffalo with an additional $132,000. In the past week, borrowing costs were up by more than $40,000.

"We're in the middle of a global economic credit crisis," said Comptroller Andrew A. SanFilippo, adding that even experts can't predict what will happen from one day to the next.

Granted, the higher borrowing tab on about $63 million has been absorbed by savings since the debt was restructured in May. But if rates stay high for a prolonged period, city officials warned the costs could be significant.

Interest rates on the restructured debt averaged about 1.5 percent for most of the summer. Two weeks ago, the rate ballooned fivefold to 7.78 percent. This past week, the rate was 5.6 percent -- still nearly four times higher than the summer rates.

SanFilippo is hoping rates will decline in the near future. One good omen is that the interest rate on Buffalo's water bonds have dropped a couple of percentage points since it peaked in late September. What's more, Deputy Comptroller Jeanette M. Mongold stressed that the water system debt is costing taxpayers less than if the city had pursued fixed-rate borrowing.

Three years ago, the water system joined a growing number of municipalities in using complex "swap" agreements to sell bonds. The city opted to use auction-rate bonds that change weekly, a practice that saved hundreds of thousand dollars in the early phases.

However, interest rates in the auction-rate market skyrocketed earlier this year after the subprime mortgage crisis erupted. Several months ago, the city left that collapsing market and switched to a variable rate bond.

The turmoil is causing headaches for other municipalities, said Mongold, noting that any entity currently in the financial markets is experiencing the same -- or more severe -- fluctuations and anxieties.


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