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Monday, October 15, 2007

Portland vs. Seattle city debt: It's not even close

During our recent series on the long-term debt of the City of Portland, some commenters wrote in to tell me I should express my opinion on the optimum level of municipal debt per resident. I didn't take that bait, but I surmised that $7,842.47 per resident, which is where the city stands at last reckoning, was too high. Some asked for a comparison with other cities. I replied that I wasn't sure how relevant that would be. Remember what your grandma used to tell you about what not to do if your friend jumps off a bridge.

Relevance questions aside, the prospect of a comparison did pique my curiosity. And so I put in a call to folks at the City of Seattle, who were nice enough to steer me to all the documents one needs to get a picture of the municipal debt situation up there. They issued a huge wad of refinancing and construction bonds back in April, and the "official statement" (bond sales document) for that borrowing provides some excellent data. Then there's the massive "comprehensive annual financial report" for 2006. Between the two documents, you get a decent look at Seattle's finances.

They're in way better shape than we are in Portland.

First and foremost, their employee pensions are actually pretty well funded. They show an unfunded pension liability of $225.8 million, which is a far cry from Portland's $1.8 billion (with a "b") unfunded police and fire pension liability. There's an additional twist here, however: Seattle has an old police and fire pension system, changed back in the early '70s, that's still paying benefits to police and firefighters from the good old days. The city does not label the liabilities of that system as "unfunded," but based on what the financing documents say, it appears that in essence they are. (The firefighters' fund gets a share of the state tax on fire insurance premiums, and the city has started a small sinking fund for some of the liabilities, but it's not clear how much of the benefits really come from city taxpayers on an ongoing basis -- probably most of them.) If you treat the actuarial liability of those pension programs as completely unfunded, Seattle's pension debt goes up to $499.6 million.

As for long-term bonds and other long-term liabilities, Seattle comes in at $3.48 billion -- higher than Portland's $2.61 billion, but there's a big asterisk there. Seattle has public power -- the city owns and operates the power delivery system up that way. And if you subtract out long-term debt for the power system, which you'd have to do in order to make an apples-to-apples comparison to Portland (where we residents also pay off the private power companies' debts, as well as the city's), you get a long-term debt total for Seattle of $2,078,530,528 (not including pensions). Pensions and other long-term indebtedness together come to $2,578,130,528.

I guess I hadn't thought about it in a while, but Seattle doesn't have many more people within its city limits than Portland does. Its most recent population estimate is 578,700, compared to Portland's 562,690. When you divide the Seattle long-term debt by the population, you come to a debt of $4,455.04 per resident. That's nowhere near what the debt per capita comes to down here. If you don't count the Seattle power bonds (and again, you shouldn't), Portland residents are saddled with much more in per capita city liabilities than Seattle residents are -- something like 76 percent more.

Just to placate the naysayers out there, I've also run the Seattle numbers with the power company debt included. Emerald City residents are still better off than Rose City dwellers, even in that apples-to-oranges comparison. Their total pension and long-term debt comes to $3,987,345,528, compared to Portland's total, which is about $425 million higher. In other words, even if the entire Seattle power system suddenly stopped generating money and all its assets became worthless, the residents up there would still be left holding a smaller bag than Portland residents are now. Seattle's long-term debt per resident, counting the power system's bonds, is $6,890.18.

As I've said, I'm not all that keen on the comparative approach to managing one's finances. Just because my next door neighbor has run up $60,000 on credit cards shouldn't make me comfortable with the fact that I've run up only $40,000. But if you think you're going to feel better about the City of Portland's obscene debt load by looking to a place like Seattle, forget it.

Comments (37)

Time for action?

Like what? Some kind of silent demonstration with the property tax bills, perhaps?

I was thinking more of finding and promoting a mayoral candidate who would recognize the problem (especially the unfunded f&p p&d) and have some concrete proposals (probably not involving tax cuts) to deal with it.

But............our debt is more sustainable and they are doing this for the children!

Jack, I want to thank you for doing a real public service. I tried doing that when Vera opened the budget making to the public, it was a sham and she did it on purpose. But most of those thought they were really doing a service and were giddy over the transparency...pure undiluted bulls**t.
How quiet the loudmouth of city hall, Smell bad Randy is on this, and Sam the scam too.Potter doesn't give a damn as he is parting ways. Richie Rich Sten could care less and Saltzman is wondering what you are talking about..DUH! And mainly where is good ol' number game player Gary Blackmer?

Dave Lister for Mayor!

(No, not Amanda, not even for city coucil She's too tight with the unions, and will never act to fix the P&F problem. )

good analysis... very clear what our #1 budget problem is.

I should think Seattle has a whole lot more earning power for paying down debt than Portland, too. Seattle has a deep water port with Boeing and Microsoft nearby. You might think Portland is taking on relatively more debt to remake itself into a tourist/retiree destination but I think Seattle attracts more tourists and retirees. Then, too, Portland's higher pension obligations show the debt isn't so much for investment as for enriching certain groups of Portlanders.

P.S Dave Lister has indicated he is not running for a City Council position in next year's elections. Too bad, but I can understand why folks like Dave are reluctant to run. It takes a lot of work, you give up a lot your private and family life, and you're up against long odds. Maybe we should put someone on the ballot who does nothing but file and get in the voters phamplet so as too give us an alternative to Randy Leonard (cellphone tax guy) and Sam Adams (street maintenance "fee" guy). This wouldn't ask a whole lot from the potential candidate, would give us a fiscal conservative atlernative, and allow us to do more than just gripe.

I completely agree with KISS on this - you've provided all of us with valuable information. Now we have to do something about it.

What makes this level of debt even more distressing is where the money went: to alarge degree, on condo projects that have uglified parts of the city, enriched their developers, and clogged the roads with more traffic than they can handle.

Action like larger numbers of people becoming aware of the problem. Your analysis is clear, unbiased & easy to understand. Change will only come from a groundswell of public pressure. Your statement published in paid advertorials in a few newspaper & TV spots would have meaningful & far reaching effect.

Friday I went down to City Hall and asked around about the Cities debt hoping to learn more. In treasury they only do bonds so they don't include the pension liability. Blackmer's office referred me to the office of Management and Finance. But they do the budget, not debt. You're right Jack, this is not easy to figure out.

On public utility debt: In Seattle I believe the taxpayers are directly responsible. Here in Portland it's the rate payers. And I think that's pretty much the same as taxpayers. Maybe you should at least mention the debt of of our private utilities and who will pay it off.
And thanks again for your great work.

I'm not sure if this would affect the analysis, but it might be worth looking at. I think it was good to run the analysis with the Seattle public power debt in and out. I'm not sure if Seattle provides their own water and sanitary sewer utilities - I'm sure a good chunk of Portland's debt is related to those activities. If Seattle doesn't provide those services, that might explain their comparatively lower debt burden.

I think the question about "optimum" debt level is interesting, but essentially unanswerable. I think your credit card analogy makes the point: different people have different debt comfort levels.

I think a more apt inquiry is to ask: how much is the debt load costing each of us per year? Although our calculations of this sum will necessarily be imprecise, we still can get a rough idea. Remember first that all of the long term debt will be repaid (unlike the federal debt which is constantly refinanced). The bonds will be paid. The retirement benefits will be paid. The bonds will typically be paid in 30 years or less. The retirement benefits will also be paid in about 30 years, more or less depending upon retirement dates and subsequent survival rates. So a very rough guess is that all of the principal long term debt will be paid in 30 years. Divide 30 years into the amount of the long term debt for Portland and you get an annual per capita payment of about $225 - this is just to pay off principal, it does not include accruing interest on the bonds. Translated to the population as a whole, it means that (population times annual cost - $225 x 562,000) the city pays about $126 million per year just to pay off the principal amount of its annual share of long term debt. How do you feel about those numbers?

Admitedly, this is a very rough calculation. But I think it provides a more concrete meaning as to how the debt affects each resident, and the city budget as a whole.

Thank you for covering this issue, Jack. Hopefully the mainstream media in Portland will pick up on the issue and thrust it into the spotlight for the coming elections. I don't see much of the following wisdom in the actions of Portland's City Council.

"We must not let our rulers load us with perpetual debt." Thomas Jefferson

"All the perplexities, confusion and distress in America arise not from defects in their Constitution or Confederation, nor from want of honor or virtue, so much as downright ignorance of the nature of coin, credit, and circulation." John Adams

"I, however, place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared." Thomas Jefferson

"No pecuniary consideration is more urgent, than the regular redemption and discharge of the public debt: on none can delay be more injurious, or an economy of time more valuable." George Washington

"Live within your means, never be in debt, and by husbanding your money you can always lay it out well. But when you get in debt you become a slave." Andrew Jackson

"If you would know the value of money, go try to borrow some; for he that goes a-borrowing goes a-sorrowing." Benjamin Franklin

Very interesting. Looks to me like the big difference is Portland's police and firefighter pension debt. That's the real monkey on the city's back.

There's a monkey on our back, it's been there for YEARS, and it's actually a GORILLA rather than a mere monkey. The current City Hall crew a) caused the problem, b) are direct beneficiaries of the current system (Leonard & Potter), and c) refuse to take the drastic steps needed to fix the problem.

I wish I had davidg's confidence regarding the repayment of the debt.

While I agree that the bonds currently outstanding will probably be paid, I have zero confidence that the powers that be in the CoP will not issue more bonds and notes each year, such that the bonded indebtedness will ever actually be reduced or retired.

I think it will just be rolled over and over and over forever, or as long as CoP can find underwriters sucker enough to bid on the auctions and resell the bonds / notes to investors wanting double tax free (federal and Oregon income tax exempt) income.

All of this is interesting, but given that City Council has been keenly aware of the problem with police and firefighter pension program (to the point of last year's effort to reform it), this analysis does not really break ground (IMHO). And while I am not suggesting that the fixes really fixed the problem, no one seems to be advocating that everything is great.

"And while I am not suggesting that the fixes really fixed the problem, no one seems to be advocating that everything is great."

Huh? That's really taking a bold stand.

I don't think you realize that the current city council realizes the hole they are digging. Usually you don't find out until it is too late a la San Diego.

Example (I only mention him since it looks like he wants to be mayor), Mr Adams thinks it is OK to take on debt to build a tram for east-side redevel, help finance an Armory Theater, rebuild a baseball stadium while working for Vera and I think this is just the beginning of the list if he gets in.

It's always easy to build your own Sim City with other people's money. If it goes south, then Sam goes his way and sticks us with the bill.

By sticking us with the bill, I mean they can neglect sewers and then rasie our rates to pay for them, neglet streets and then have the gall to ask for gas tax money, say we have to curtail police services, build a very expensive streetcar bridge while letting the Sellwood bridge fall apart (yes, I know it is the county's but they could help), figure someway to pungle up another $100M to fix SoWa and the couple of thousand of people that live there and in general ignore the rest of Portland outside of the downtown area.

This is a city council that sees the budget as a piggy-bank to help their friends or compensate for a childhood lived in poverty. If you think an auditor will slow them, forget it, he is merely a rubber stamp.

"how much is the debt load costing each of us per year?"

My only issue with that is the increase in the debt level each passing year.

It is growing a lot faster than the rate of growth of population. What will stop them from continuing to increase spending/borrowing at this pace in this town? It's all about using money to help your friends.

I'm not sure if Seattle provides their own water and sanitary sewer utilities

They do, and the water and sewer debt is included in the bond total.

Nice work Jack. I'm still trying to understand the big unfunded pension number. I'll have to dig around a bit myself to see if I can understand where that number comes from.

They don't have any investment fund to pay the benefits. It's pay as you go.

Looks to me like the big difference is Portland's police and firefighter pension debt. That's the real monkey on the city's back.

Not really. There's a $600 million difference in long-term debt for other purposes as well. Consider this: Portland's urban renewal debt is $596,806,370, and growing rapidly.

Go by streetcar!

I think a more apt inquiry is to ask: how much is the debt load costing each of us per year?

At $4.4 billion, 25-year amortization, and an interest rate of 4.25 percent, level debt service payments (principal and interest) come to $289 million a year. That's around $513 per resident per year, just to pay off money we've already spent.

Portland's entire property tax revenue this year is $378 million. In other words, if we were paying our debt off responsibly, we'd be sending 76 percent of our property tax revenues off to bondholders.

This is a collapse in the making.

If I'm not mistaken Seattle City Light has some real valuable electric generating assets such that I don't think the Seattle City Light's debt should be included in the Seattle debt level estimate. I believe Seattle's assets include ultra low cost hydro-electric generating plants which would likely sell yielding large capital gains. I might be off but my memory suggests Seattle has some very valuable power plant and transmission assets.

Bob Clark, don't forget that Portland has some real valuable assets in its water bureau. It sells more than half of its water volume to other water districts. You can cherry pick all day.

There's no cherry picking going on here. Portland does not have a power supply system, and so it's not appropriate to include Seattle's power supply debt in a comparison.

Both cities do have water systems, and both cities' water system debt is included in the totals.

Sorry, Jerry, but you're not going to be able to make these numbers go away.

Jack, sorry you misread my comment (or I can't express myself). You should know I agree with you wholeheartedly on your debt analysis. I thought Clark felt your comparisons of debt between Portland and Seattle was misconstrued.

Concerning your PDC/Urban Renewal debt, I think that under closer examination the amount is even higher. For example, a Budget Subcommittee of SoWhats URA now meeting regularly is having a difficult time developing a spreadsheet that shows what has been spent, funding sources, and budgets for future identified projects. If we were to have professional, outside audits of URAs there would be many missing numbers, and more.

I spent a little bit of time reading thru the 2007-08 Portland budget. It isn't written very clearly but it does appear that the city is running an operating deficit that is financed by the selling of bonds. As far as I can see, the city is planning to spend $1.6B for expenses but will only take in about $1.3B in taxes, service charges, etc. The rest of the operating expenses are covered by income from bonds. Well if that is true, it isn't going to last for long. The city really needs to run a slight surplus each year so they can pay off existing debt. I couldn't find any kind of balance sheet information in the budget publication so they must not like to provide that info. There is some talk about how small the general obligation debt is but that seems to be a classic shell game where they just discuss one small part of the total picture and claim that it is fine.
It would be interesting to find someone who really knows how this stuff works and get some candid answers from them.

Jack, I'm still hung up on the $1.8B pension liability. That is a really big problem if indeed that is unfunded. I don't see any assets listed in the Portland budget so maybe you're correct and Portland doesn't have any investments?

I've never been a big fan of PERS since I don't understand why the State even bothers to run its own pension plan when there are professionals who do that stuff, but I will say that at least they have some assets. In 2006 the PERS fund took in $784M from members, earned $7B in investement returns and paid out $2.4B in benefits. Now that is how you run a pension fund; $8B in the door, $2.4B out the door! No reason Portland can't do the same thing. If they can't run a pension fund then they should just shut it down and move everyone over to 401K's.


Maybe this will help you in your next wanderings around City Hall.

Financial Planning - Casey Short
Phone: 503-823-5707

Quite frankly I don't know what he does but the Title suggests he knows something about Portland's long term debt.

Debt Management - Eric Johansen
Phone: 503-823-6851

Eric runs the section that issues the long term Bonds for the City.

Treasury - David Thurman
Phone: 503-823-4220

Dave is the City Treasurer and his main day to day functions are investing the City revenues during the Budget year and oversight of the City Employees 457B Savings plan.(401k)

Pension Oversight - Steve Manton
Phone: 503-823-6963

Steve is the City's expert on PERS. I don't know if he also is a liason to Police & Fire Pension

Police/Fire Pension Chair - Yvonne Deckard
Human Resources Director

Phone: 503-823-3572

Yvonne is the City's HR Director and Chairs the Board of Trustees for the Police & Fire pension fund.

Have fun.

Greg C


This only increases my worry that we will lose out in the competitive race with other cities such as our local neighbor, Seattle, but also RDU, Austin, Salt Lake City, Boise, etc.

See my comments in response to a BlueOregon posting comparing transit in Seattle and Portland.

We may be ahead of the game on transit, but we're behind Seattle on almost every other measure. Yes, *if* condos and dense urban settings are the future of America, we're well positioned.

But if things develop in another direction, if the young urbanites find a new hot town, we are going to be hamstrung by these debt obligations.

I think your comments suggest refining our relevant question a little further: how much does it cost the city each year to service the long-term debt? Then, as you have done, compare that to revenues to see what is left for current operating costs. As you point out, the conclusions might be scary.

My 30 year assumption for the payout is probably too long. Your assumption of 25 years is probably more realistic, but it really isn’t necessary to guess on this.

The payout schedule for the bonds (principal and interest) is something the city should be able to produce.

The payout schedule for the unfunded pension liabilities depends upon lots of assumptions about retirement dates, salary histories, and eventual dates of death. But realistic assumptions can certainly be made, that is where the $1.8 billion figure came from in the first place! Whoever did the $1.8 billion calculation must have implicitly created a schedule showing when and how much will be paid out each year. It, of course, won’t perfectly predict eventual actual expenses, but it certainly should serve as a useful working model. Do we know who created the $1.8 billion projection? Can we make the actual annual projections public?

Once we have the actual bond payout schedule and the retirement fund expenditure projections, we can simply add up the totals over time and compare that to city revenue projections.

There is always some guesswork in these kinds of analysis, but that is what financial analysts do everyday anyway. The city should inform the citizens of the potential consequences of today’s financial decisions. I am sure the citizens would like to know.

Actual debt service schedules are there, but some of these loans have weird amortization schedules -- big balloon payments and the like. It's like an adjustable mortgage with interest only for a while. When the big payments come due, they just refinance.

As the home mortgage market debacles show, that's a bad strategy.

Municipal long-term debt is often created with its own dedicated funding source, usually a property tax that shows up as a special line item on your property tax bill. To the extent Portland's long term debt is set up like that, then it shouldn't have an impact on the city's operating budget as I suggested above. But for the taxpayer, it doesn't matter what the line items on his bill are for, the taxpayer pays it all out of his current income or savings.

Unfunded pension liabilities, on the other hand, by definition have no dedicated funding source and so are paid from current city revenues.

I was surprised at what you said about the (perpetual) refinancing of the city's long-term debt. I thought the city normally couldn't create long-term debt OR extend existing debt by refinancing unless the voters approved it first. I suppose the original bonds may have included a provision allowing for their refinancing. But the voters are never told in the voters' pamphlet about such a provision when asked to approve bonds.

I thought the city normally couldn't create long-term debt OR extend existing debt by refinancing unless the voters approved it first.

Clearly not true.

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