dollars. i've talked about moving toward a municipal bank. there is something i'm still pursuing as an office. i think this -- that we have, on such a worldwide scandal based on how banks have manipulated the market means we have to find local measures to address our own financial solvency and am looking forward on it for years to come. there are a number of speakers presenting on the city side. i would like to invite up, first and foremost, gnawedia from the crorl''s -- controller's office of finance who has been helpful in monitoring the city's finances and the microphone is yours. >> good afternoon, supervisors. [n[nodirector of public finance. thank you for hearing this item and giving us opportunity to present the city's side in terms of how we done the analysis as

relates to the libo scandal. mr. clark, could you please turn on the -- thank you. so we have here, with me in the audience, myself, who will be giving the overview, kevin cohen from san francisco international airport, who will speak specifically to the port's portfolio, we have jay -- from the employees retirement system, craig ghetto from the retirement and craig to speak on this item as well. i will do the overview but i want to acknowledge that most of what i was going to present has already been summarized. next slide please. so what is libo. i think we clearly heard it is the london inter -- rate assumed by lending banks in london. that they could charge if they

were to borrow funds from another bank. it is the most quoted rate. it is published under the auspices of the british bankers association, and it's been in place since 1998. it is an index representing the benchmark rate in the london money markets. it is the most widely used benchmark rate for -- interest rates in the world providing basis for establishing interest rates on financial products ranging from commercial loans to -- contracts. it is also considered the most critical benchmark for short-term interest rate and is calculated from many different borrowing periods from overnight, one month, three months, up to a year and has different -- of currency as the euro, et cetera. the 18 banks that participate in the submission, and the way it is done is that they take the four highest and four lowest are

thrown out and the average of the remaining 10 is averaged out and the rate is determined from the average. without some of the banks that participate i won't go through each line item but i will highlight that there are four u.s. banks and canadian banks, three of them u.s., bank of america, citibank, j.p. morgan chase, and there are three japanese banks. so as we saw in the clip that was presented earlier the libber scandal arose when it was discovered that banks were falsely inflating on or deflating rates to profit from trades or give the the impression that they were more creditworthy than they were. so what they did, in order to show profit, or to show that they were creditworthy.

to date, i've highlighted the bank settlements and the supervisor avalos has also called out some of these settlements to date. as of june -- in june 2012 bar clay's paid 264 million to u.k. and u.k. regulators. usb was fined $1.5 billion by u.s., u.k., and swiss regulators in december 2012 and royal bank of disotland was find 612 million by u.s. and u.k. regulators in february of this year. in addition to these three banks, 12 of the 15 remaining banks contributing to the libber calculation are under investigation by u.s. ande and u.s. regulators, commodities trading commission and the u.s. department of justice. >> supervisor avalos: you have

on the beginning of the slide you mention the banks allegedly submitted rates. there actually have been real admission from the banks, right, that they have actually contributed to manipulation. is that correct? >> that is correct. and the deputy city attorney will be speaking -- >> supervisor avalos: as part of the settlement is it correct the banks pleaded guilty or is that -- >> i will leave that to the city attorney. >> supervisor avalos: that's what we have attorneys for. this is also for the city attorney, we have fines that were paid to regulators but in fact investors have not recovered losses at all in restitution from the scandal. is that correct? >> i believe the deputy city attorney would confirm that. >> supervisor avalos: we'll get to that. thank you. >> thank you. the next slide. thank you. the industry has an idea of the

range of time it is debatable and the exact time line has not yet been determined. the time line before you is an illustrative purposes only. and this time line was provided by -- financial advisors, the airport -- adviser. in 2007 bankers and other market participants began expressing concern to the british bankers association about whether libor setting banks reported rates that were true. at the time, libor manipulated to be higher and lower so that the banks could profit from trades. it is estimated that the impact here, showing as little or none, because they artificially high or low rates could have canceled out the impact so therefore it could potentially have been revenue neutral. in 2008, the wall street journal

published an analysis with findings that a number of banks submitted significantly lower borrowing costs for libor than other market measures such as credit default. and during that period we were estimating that it could be as high as 30 basis points. and then what we're calling the late financial crisis is between the period 2009 and '10 where libor continued but to a lesser degree. because this was after the wall street journal report where it was discussed publicly so it's been advised here that the manipulation was to a lesser degree and as a result the impact was reduced by 10 to 20 basis points. in march 2011 reports began to circulate that the u.s. department of justice, securities exchange commission,

and the commodities future tradings commission had launched investigation in the libor setting banks to investigate libor. >> supervisor avalos: that is the extent of what we believe was the duration of the manipulation that -- the city or do you think we can go further than 2007? >> i think the reports have been clear that it started in 2007. i think it's what the concern is, is whether it was beyond 2010 to '11 or '12. so they're still -- it hasn't been publicly determined but every speciality is deciding on different time periods. >> supervisor avalos: so prior to 2007 there was no reported manipulating people were aware of around the world? >> i don't know that for a fact. we can research that and get back to you. >> supervisor avalos: is there any possibility that we could be at much higher basis points in

terms of the magnitude of the impact? >> well i think if you -- depending on where you are in this transaction, typically liobr rates are pretty low. as an example i believe one month was 20 basis points equivalent to 2.0 percent and the 6 month i think was approximately .28%. if you're talking about shift and manipulation in this current environment it doesn't demonstrate to be that much higher. so if it you're looking at that as a back of the envelope calculation what is being proposed here as estimated impact seems more realistic. but i have heard the range as high in some instances or lower. >> supervisor avalos: thank you. >> uh-huh. this next slide demonstrates the

analysis of the financial impact as relates to libor manipulation requires an analysis of the debt side and the investment side of the city's operation. as you can see on the debt side, which showed you the fixed rate and the variable rate. on the fixed rate, libor manipulation was not impacted. we have listed all the city agencies that have a debt portfolio, including the city's general fund, the airport, the public utilities commission, the port of san francisco, and the san francisco municipal transportation authority. we haven't reached out to include external agencies, but we know that the city college as well as the san francisco unified school district has debt portfolio and would fall under this category and would not be impacted. on the variable side of the house, the department is issuing variable rate indebtedness index to libor may have been impacted.

in terms of the airport, if it is backed by -- or index to libor they could have exposure and kevin cohen will speak specifically to the airport's portfolio as relates to that. in terms of the city we have variable rate debt in our portfolio that is not -- is unhedged and it doesn't have a swap. it is approximately $129 million or 5% of the city's 2.9 billion in debt outstanding. and so for purposes of this illustration we haven't included commercial paper program, even though they're considered variable but we don't feel they're impacted and would make this slide more complicated. and then if you move on to the next side which is the investment side, there's the treasury component, which has the treasury -- and we have -- from the treasurer's office will speak to that as well.

and then we have the retirement fund which has employees retirement system fund trust, who jay is here also, who can speak to that. with that, i can turn it over to kevin cohen from the san francisco international is airport to given more details on their portfolio. >> supervisor avalos: thank you for your work on this presentation. you mentioned brifly the city -- add the school district that they don't have investments who have been affected by libor, is that what you said? >> yes. in terms of the debt the 30r8 -- so they wouldn't have been affected but because they're -- all the different entities are they could potentially be impact but on the debt side of the house, no. >> supervisor avalos: very good. thank you. >> thank you. >> good afternoon, chair farrell, members of the committee, kevin cohen, assistant deputy director near capital finance at san francisco

international airport. before we move into the airport portion of the presentation i wanted to take a couple of minutes to kind of give you some background on the airport's debt portfolio. the airport currently has 4.3 billion in outstanding debt of what we call airport revenue bonds where the principle and interest is solely paid by the users of the airport. it does not receive any support from the taxpayers of san francisco. in fact, last year, the airport contributed 15% of our concession revenue to the general fund, which was 34 million. that figure has since doubled over the last 10 years to this figure today. the airport currently held a credit rating of a plus from the three credit rating agencies. in general airports require a lot of capital. we want to ensure the traveling public has a safe, comfortable and inviting facility to travel

through on a daily basis. in the upcoming slides i hope you will see the use of financial instruments has allowed sfo to be one of the most competitive airports in the united states with 12 years of growth over the past 12 years, even through the the most recent financial recession. next slide please. so the airport uses interest rate -- manages interest rate risks with the use of swaps but let me give you context as to why the airport is using those mechanisms. in the early 2000 we know living in the bay area that we went through the dotcom bust, 9/11. the airport opened a new international terminal and facility supporting the new international terminal. the traffic in the bay area for air travel dropped off 25%. so we quickly moved to introduce

variable rate debt to our portfolio to better align the debt portfolio with the traffic in the bay area. by doing so what we did was we converted what was then a 100% fixed rate debt portfolio. we then moved 20% of that fixed debt portfolio into variable rate. by doing so it saved the airport about $30 million a year. and by doing that, it relieved the finances and made again put the finances more in line with the traffic that was traveling through the airport. so in doing so what we did is when we entered into the variable rate we then hedged the variable interest rates with interest rate swapped tied to libor. at that time back in 2007 we entered into approximately $790 million worth of interest rate swaps that again hedged potential rising interest rates over the next 30 years. as -- >> supervisor avalos: can you explain how swap works for those

hearing for the first time. >> sure. for example a variable rate bond may reset at 1%, and next week it may reset at 1 1/2%. if you put in an interest rate swap, it will lock it at for example 3%. so even though rates are going up, the airport would never be at risk to pay more than 3% with the interest rate swap. if you didn't have the swap there, and interest rates went from 1% let's say dramatically went to 5%, the airport would have to quickly come up with that difference. and through the city budgeting process, it's not always easy to get a quick appropriation to take care of that spike in interest rates. so, again, the interest rate swap helps level out and provides an insurance policy that the airport won't have to worry about going above that 3% rate. does that help? okay. so as time went on, in 2010, long-term interest rates

stabilized a little bit so we began to move variable rates back in the fixed rates and reduced the airport swap portfolio from $790 million to $580 million and did that again in 2010. we had an opportunity to convert more variable rate back to fixed rate because long-term fixed rates were dropping and we then converted those variable rate bonds and terminated the appropriate swap. today we're down to $483 million in swaps. so how does it work? the impact of libor is if it is artificially set high then the airport receives more from the interest rate swaps or payments. if libor is artificially low then the airport receives less from the swaps which is one of the concerns with the libor manipulation. in terption of the order of magnitude we haven't done a order of magnitude of how we were affected but back in 2010

we tried to roughly estimate if libor were manipulated 10 basis points for one year, the airport would have paid $371,000 more than it should have. and through a sensitivity analysis we also did that for 20 basis points. the airport would have paid $723,000 a year and for 30 basis points it would be $1.1 million a year. in the prior slide between 2007 and 2012, you could make some assumptions of what do we think the timeframe was in that zone that we would multiply those numbers by. but we have not done an exact calculation because we don't know exactly what timeframe our swaps were moving up and down. there could have been some times where the the interest rates were being manipulated on the low side and there could have been some times that the interest rates could have been

manipulated on the high side, and at the same time those could have canceled. so that has not been discussed. >> supervisor avalos: is there anything that can be discerned looking forward? >> we would -- it would take more research to try and figure that out. >> supervisor avalos: is there an intent to do that? >> we haven't made any -- look into that since 2010 when this first came about. >> supervisor avalos: and why not. >> -- but certainly talk about it. >> supervisor avalos: and why not? is there -- was there discussion about wanting to do that, and the decision made not to? or it just hasn't been a decision about whether to look at that or not? >> i don't think anybody knows the methodology to actually do it, to actually look at the libor reset every day, to then determine which of the 18 banks did the manipulation, to then determine how that manipulation would affect the libor rate for the airport. our libor is affected on a rate

called a one month libor. so this is happening every day and you have to calculate into the one month libor and it would entail a lot of research and we don't know the methodology but it's something we could consult our financial advisers on. so on to the next slide. so as i said, the interest rate swaps have -- was a hedge for the airport. and in fact it actually saved the airport a significant amounts of money. to answer your question that you posed earlier, if you look at the bar chart on the slide we show that variable rate demand bonds with swaps incurs a hedged interest rate of 3.69%. if we had otherwise sold those as fixed rate bonds which is the bar chart on the right the average for fix rate bond was 4%. so the difference between the two numbers is what the airport has saved since the implementation of swaps.

in fact, since we implemented swap to date the airport has saved $100 million by using these financial instruments. and we expect to save at least another $100 million using this financial instrument out to the termination of the swap which is in about 2029. so they've been a very effective tool. they've been functioning as planned and designed and we are happy to have them in place. >> supervisor avalos: these rates that you have for the fixed rates, at 4.09% is that the current rate? >> that's actually an average of long-term fixed rates kind of across the board. that's what the municipal finance people use as benchmarks to understand how you're performing against how others are performing. >> supervisor avalos: and this 3.6% is that what the maximum could be for variable rate? is that -- >> correct. >> supervisor avalos: do you know where we're at in terms of where we're at on the average? >> that is the actual rate of all of our swaps blended

together. we will never go above that rate. even if interest rates raised to 6% the airport will never pay more than 3.69. so it's a very good tool. >> supervisor avalos: how does this compare to other swraps that -- >> well, it depends on when different entities enter into swaps. the the market is always changing. in general we're very pleased with these interest rates that we locked into because when we entered into these interest rates, you know, back in 2007, long-term fixed rates were actually much higher then, they were in the 5 to 6% range so the fact that we could lock in at 3.5 or 3.6 we were very pleased to do that. you could probably, in today's market, probably couldn't get this kind of rate today. so we feel we've done well. again, we've saved $100 million to date and there's a lot of savings coming in the future with the use of these tools. >> supervisor avalos: do you

think this might be a question for the city attorney but do you think because there has been manipulation of the market that we would have some leverage to be able to renegotiate our interest rates for swaps? >> well, like most agreements, these agreements are long-term. and when we entered into these agreements, they were for 30 years. there's really no -- in terms of today, there's no legal reason -- we don't have any legal leverage to actually renegotiate these rates. the only way that would happen is that if these swap providers actually got a credit downgrade. we would have the ability to terminate the swap in our favor. but in terms of negotiating a lower rate than the 3.69, i hadn't heard -- i haven't heard a swap being negotiated free willing today. >> supervisor avalos: who are the major swap providers?

>> j.p. bore gan, bair sterns which merged with j.p. morgan. i have it all here. so our swap providers are j.p. morgan, merrill, and goldman. >> supervisor avalos: how many of those were part of libor manipulation? >> if i were the chart it was j.p. morgan, just one. >> supervisor avalos: do you know how our airport swaps differ from the h&r museum swaps? >> i don't know the nature of the asian museum swap. that's all the information i have. thank you. >> good afternoon. jay hugy from the san francisco retirement system. retirement system staff and our consultants have been evaluating

the potential libor related losses in the portfolio since the city of bawlt more filed its suit in the summer of 2012. we initiated this investigation or the evaluation pursuant to the retirement board's securities litigation policy which it adopted in 2005, and is an ongoing policy where we have consultants and staff routinely monitor securities litigation related to any potential holdings that we would have in the trust. the scope of our evaluation included all of our assets, all of our holdings that would have any kind of index to libor including but not limited to investment rate swaps. for the time period august 2007 through february 2009 and this was the time period that was put forth in the city o baltimore

lawsuit. we had exposure. the trust had exposure in its real estate portfolio as well as in its fixed income portfolio. generally speaking we would benefit from artificially low libor rates in our real estate portfolio and be disadvantaged with artificially low libor rates in our income portfolio. the result of our evaluation is that we -- during the period had interest rate swaps in place. currently we have no interest rate swaps in our portfolio. the scope of our interest rate swaps were as high as 41 million, as low as 3 million and now we currently have no interest rate swaps in our portfolio. what we've estimated its for every 10 basis points based on our overall holdings if there is

settlement we might be required to pay back some of the excess interest -- or pay back the benefit that we got, as well as collect our losses. but what we have determined from our analysis is, from a thet standpoint, for every 10 basis points we assume potentially 200,000 worth of losses, net losses to the fund, during this period of time. and i'd be happy to answer any questions that you might have. >> supervisor avalos: just wondering how you went about estimating the timeframe for the libor manipulation and what the magnitude is, like what is the process? >> since it was city of baltimore litigation that triggered our evaluation, it was set in the city of baltimore which was august, 2007, through february 2009. we looked at it again in relation to the city of san mateo county and san diego

county filing and extending that period in early 2011, and our analysis based on net positions in our real estate and fixed income really was not significantly different for that extended period. >> supervisor avalos: so do you think it's possible for the city, and this can be a city attorney question, to pursue losses that we've had regardless of what any gains we may have had in -- due to libor manipulation? >> i would suggest that it's the retirement board's determination pursue. they feel very strongly we should pursue any losses that would accrue to the detriment of the plan÷hñ?ñ?ñ?ñ beneficiaries. like i said, through thercñ?ñ? n brothers settlement, we were in fact required to pay money back that, because of mñ?ñ?ñ? the manipulation, we were not entitled to.veñ?ñ?ñ?ñ? and in exchange, we received money wherenlñ?ñ?ñ?ñ we lost.

so i'm not saying or suggesting? that this would necessarily be the the case, but weliñ?ñ?ñ?ñ? e that circumstance under which the retirement system,ñ?ñ?ñ?ñ hg holdings on both sides, which would have benefitedñ?ñ?ñ? or bn disadvantaged, were required to -- on]jñ?ñ?ñ? the settlement, pay both sides. >> supervisor avalos: does the pursue recovery of losses? >> we are confident -- and part of our evaluation is all of the holdings that we had during this period, from 2007 through 2011 are covered in the class of securities that are the subject of all the litigation and we know, and we have in the past, and we reteenly participate as a member of the class to recover our claims. so the retirement board has shown no interest in initiating a lawsuit, per say, as a retirement board, knowing that we will be able to participate to our full extent of our