City blames confusion for interest rate snafu

ESCONDIDO, Jun 27, 2009 (North County Times - McClatchy-Tribune Information Services via COMTEX) -- WFC | Quote | Chart | News | PowerRating -- City officials are blaming confusion about interest rates for their questionable decision in March to pay a $1.7 million debt to Wells Fargo Bank over five years instead of immediately.

The debt comes from a line of credit that the city's struggling performing arts center has accumulated during the past 12 years.

City officials had thought they were going to pay 3.2 percent on the five-year loan because it was characterized by the bank as a "prime rate" loan, city finance chief Gil Rojas said Thursday. But the city was recently told by Wells Fargo that the interest rate would be at least 5 percent, Rojas said.

It was unclear who was responsible for the confusion. City officials said the loan involved a three-way dialogue among City Hall, the bank and the arts center.

The higher rate will increase the interest paid over the course of the loan by about $90,000, prompting city officials to reconsider the option of paying the entire debt off immediately with reserves, Rojas said.

Because the city earns roughly 3 percent on its reserves and investments, Rojas said the five-year loan option had seemed like the right choice when the interest rate was 3.2 percent. "It looked like it would be a wash," he said.

But at a 5 percent rate, paying the loan off immediately seems like a much better option, he said. That possibility will be presented to the City Council at an emergency budget meeting at 4 p.m. Monday, he said. The loan can be paid off immediately without penalty.

Council members Olga Diaz and Dick Daniels, who make up the council's arts center subcommittee, said they have both become supporters of paying the loan off now.

"Five percent is a good loan, but not when prime rate is close to 3," said Daniels. "We've got to pay this thing off."

Diaz is a proponent of paying off virtually all city debts to reduce the drag of interest payments on the city's annual operating budget.

Rojas said it was unclear why city officials thought the interest rate would be 3.2 percent, explaining that he was not consulted when the option was first discussed by officials from the city, arts center and the bank. The city's mistaken impression came to light when Wells Fargo recently sent the loan papers to Rojas, he said.

Vicky Basehore, chief executive of the arts center, acknowledged last week that she had been confused about the loan. But she declined to provide details.

"I'm not a banker, so I don't understand the inner workings of that industry," Basehore said.

City officials have said that the debt resulted from the unwillingness of previous city councils to acknowledge the full costs of operating the arts center, which receives roughly $3 million per year in city subsidies. The size of annual deficits at the center has been minimized by repeatedly borrowing extra money on the Wells Fargo line of credit, they said.

The council decided last summer to end the practice of letting arts center employees and volunteers book theater performances. Instead, the center's two theaters will now be rented by private promoters, who will book performances and take all the financial risk.

City officials are also considering a new management model that would chop the center into three separate parts: the theaters, the museums and the conference center.

All three parts have been managed by the arts center board of trustees since the facility opened in 1994, but the proposal envisions the conference center and theaters being run instead by private companies with expertise in those fields.

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