MANTECA —Turmoil on Wall Street brought on by the sub-prime mortgage debacle will likely cost the city more than $1,000,000 over the next two years.

Money that Manteca’s Redevelopment Agency borrowed in 2005 has left the city exposed to wild fluctuations in the bond markets — caused by panic over bonds backed by risky home mortgages.

Borrowing costs on the city’s $50 million variable-rate bond skyrocketed from 4 percent in January to about 7 percent in February, when Wall Street began to question the credibility of several major bond insurers, one of which was backing Manteca’s bond.

A new plan OK’d by the City Council Monday, April 21 brings the city’s interest rates under control, but will likely cost the city an extra $1 million in fees and interest, according to Finance Director Suzanne Mallory.

It is not Manteca’s ability to repay the bond that is affecting the rate increase, Mallory explained, but the ability of its insurer, XL Capital, which had guaranteed the bond to investors.

Because it also guaranteed many of the mortgage-backed bonds that are collapsing, XL Capital has seen its credit rating downgraded three times, making its insurance effectively useless and forcing Manteca to find another way to back the bond.

The new plan, devised by Mallory and Piper Jaffrey, the company that issued the bond, would replace XL Capital’s bond insurance with a temporary letter of credit from another bank guaranteeing payment of the bonds.

The letter of credit will last two years, at which point the city hopes a settled-down market will allow for a longer-term plan.

Until then, interest rates will remain slightly higher than before, Mallory said, costing the city roughly $253,000 each year. One-time fees for Piper Jaffray’s work will be about $285,000, and costs will likely recur when the city picks a new plan.

Manteca is not alone in its bond woes, although its insurer has faced perhaps the worst downgrade for backing a large portion of risky mortgages.

Thousands of cities and agencies have been forced to restructure their bonds when major bond insurance companies were downgraded, according to James Hammill of the California Statewide Communities Development Authority, which helps governments issue bonds.

“It’s nothing anyone could have seen, forecasted or prevented,” Hammill said.

The variable-rate bonds, which cities have used for nearly 20 years, were “really a great product, but you had the perfect storm which caused it to go haywire,” Hammill said.

Lodi and Stockton also hold variable-rate bonds, but so far Stockton has escaped any problems because its bond insurer, Assured Guaranty, did not get involved in mortgage-backed bonds and has resisted any downgrades.

According to Lodi city spokesman Jeff Hood, variable-rate bonds issued by the city’s electric utility have been minimally affected by a downgrade of the insurer, MBIA, but the city has yet to decide if any action is necessary.