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Race clouds Durham debt deal 

Leave it to Durham to let racial politics cloud what would ordinarily be a wonkish debate on municipal finance. After eight months of study, the City Council voted Monday to proceed with a proposal by the New York-based firm Rice Financial Products to swap $106 million in municipal debt, a deal that will potentially yield about $8 million in savings over 15 years but could cost millions if market conditions change adversely.

The meeting proved anticlimactic, as the council had already approved the swap in December by a 4-3 margin that broke along racial lines, with the four black council members favoring the deal. A motion would have been required to block it, and that motion never came to the table despite an impassioned plea by council member Eugene Brown to rethink the issue. The votes were already counted and the issues hashed and rehashed, and no minds were open for changing.

The swap mirrors one that Durham County approved last August; other local governments and taxing authorities in the United States have also orchestrated debt swaps using Rice, though still others (including several in North Carolina) have declined similar proposals.

Consultants, government finance officials and other experts in the field agree that Rice's swap formula, which is based on the relationships between a pair of financial indexes and can swing up and down with changes in federal tax policy, interest rates and other factors, is both innovative and complex. They also agree that the historical data favors success, and though the future cannot be predicted, Durham's strong financial position means that the city could withstand any losses that might accrue if the deal goes south.

Council members Brown and Diane Catotti led the opposition to the swap. Brown says he studied the proposal for months--he wrote an 18-page report that included more cons than pros--and had concerns about Rice's fees and other issues that were not addressed to his satisfaction. At the council meeting he also pointed out that savings for the county and other deals were running behind projections. Catotti, a trained economist, notes that she also opposed a more conventional swap proposed by Citibank that the council never considered. "I don't believe that speculative transactions are something a municipality should be engaging in," Catotti says.

On the other hand, the city's financial consultant, Public Financial Management (PFM) of Philadelphia, approved the plan while recommending that the savings be budgeted conservatively (the council's vote was to keep the entire savings in escrow to cover potential losses in the future). And after city officials asked Standard and Poor's to weigh in, the bond-rating agency gave the deal its highest mark.

A split vote would not have been a shocker under the circumstances. As city finance director Ken Pennoyer wrote in a letter to the Herald-Sun last December, "Reasonable people can disagree as to whether this is an appropriate transaction for the city ... [and it] poses significant philosophical and practical questions concerning the appropriate levels of financial risk a local governmental should accept."

But reasonableness is in the eye of the beholder, and in the weeks leading up to the final approval, the debate took on a distinctly different hue. Supporters of the deal charged that Brown and Catotti were motivated by racial bias in opposing the swap (Rice Financial founder and CEO Donald Rice is black), and supporters in turn claimed that support had more to do with awarding a fat contract to a minority firm than good financial management practices. The fundamental policy questions were all but lost in the shuffle.

Accusations came to a head in a March 24 council work session when a citizen called Catotti a racist, prompting her to walk out of the room. Catotti believes that Rice has appealed to black community leaders as a way to obfuscate the financial issues and twist the debate. "The fact that they would come to Durham from New York and play racial politics is really offensive to me," Catotti says.

Catotti also says she was approached at a funeral by Lavonia Allison, chairwoman of the influential Durham Committee for the Affairs of Black People, who suggested that her opposition to the swap was prompted by her resistance to minority enterprises who want access to city contracts.

Allison, who did not respond to a query about the incident, may have been lumping the Rice vote with a recent decision to award $3.7 million in construction contracts for the Barnes Avenue housing project. A divided council (though not strictly along racial lines) rejected the bid of Hairston Enterprises, a minority-owned Durham firm that had promised jobs to area residents and the homeless, after questions arose about its bonding. Instead, the bid went to a white-owned group from out of town, a decision that was met with hostility by Hairston and some local residents.

Rice Financial spokeswoman Cristal Baron acknowledges that Donald Rice and local deal proponents may have had informal discussions with black community leaders, but she denies that the intent was anything other than to explain the proposal to interested citizens. "The notion was that we had gone to the Durham Committee and the NAACP to make this a racial issue, and that was certainly not the case," Baron says.

That may not have been the intent, but after Rice attended an NAACP meeting and answered questions about the swap, supporters launched a campaign to pressure a yes vote that alternately argued for the deal on its merits and questioned the integrity of its detractors. In a widely distributed e-mail, Southern Anti-Racism Network director Theresa El-Amin wrote that she wasn't buying Catotti's claims of fiscal responsibility. "I see her as putting some strange microscope on the Rice proposal that the city seldom uses for many of its other projects that actually generate a whole lot of red ink," El-Amin wrote. "Diane says it's not about race. I said to Diane, it is about fairness and equity. And often fairness and equity is about racial justice and economic opportunities."

El-Amin did not respond to a request to elaborate on her points, but others say that the "strange microscope" refers to the council's insistence on adding layers to the approval process after the city Finance Director staffers, PFM and the state Local Government Commission had all offered positive assessments. Pam Green, a Durham business owner who is "part of a group of citizens trying to be sure that the facts of this story are reported fairly and accurately," says that the city has gone beyond the standard process for such transactions for reasons that are not clear. "It's kind of curious to us as to why we're in this situation," says Green, who declined to identify other members of her group beyond her husband.

Brown counters that no standard process exists for a transaction of this magnitude and complexity and that soliciting opinions from qualified local and national authorities is simply good due diligence. Besides, he says, "I didn't know a damn thing about the process because we had never done this before. I don't recall voting on a process."

In fact, both sides have a point. Though there is no cookie-cutter process for debt swaps, local governments considering debt refinancings or swaps normally rely on a combination of staff recommendations and the Local Government Commission review and then take a vote. On the other hand, others have utilized processes far more involved than Durham's: The city of Houston took three years to approve a similar deal with Rice and entertained several dozen proposals from financial institutions before reaching a decision; New Orleans officials canceled a debt swap for its airport after it had already been approved before finally going ahead with the plan after another year of scrutiny.

At the council meeting, an LFM representative said that while 60 percent of government debt swaps had been negotiated, the other 40 percent had been competitively bid. Up until the final vote, Brown continued to argue that the Rice deal should be shelved until other proposals could be invited and considered, though he allows that "I probably should have raised the lack of competition issue sooner."

But in a city whose sensitivities to race have a hair trigger, any perceived deviation from a norm is likely to raise suspicions of intent. And Brown, whose zealous efforts to kill the deal have helped polarize opinion, may have overplayed his hand. "He seems almost obsessed," says one observer who has studied the swap and has mixed feelings about its prudence. "He has personally made this a really big deal. It's brought out the other side."

Brown himself acknowledged as much at the council meeting. "I've worked on this issue since December," he said. "Probably overworked on it."

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