Bond market and bond insurance implosions can't be helping Portland
The City of Portland's supposedly sterling credit has never looked shakier to me. As we've documented on this blog in recent months, the city is around $4.6 billion in long-term debt, which is more than its tax base can reasonably support over the long haul -- at least if we're going to have police officers, a fire department, and street lights.
The reaction, quite frankly, has been widespread indifference. No one in the mainstream media seems to care in the least about the city's massive and ever-growing liabilities. And it seems none of our local media wizards read the national financial press, where all the signs of a fiscal disaster for Portland are being laid out.
About the only feedback we've received on our observations about the muncipal debt has been the oft-repeated mantra that the city has a high bond rating. But the events of the last few months have made it clear that (1) bond ratings are highly suspect, and (2) whatever ratings the city's bonds have had so far may very well be about to head south.
Let's start with the reliability of bond ratings. So much of the mortgage-related paper that is now in the toilet, around the country and around the world, enjoyed wonderful, high bond ratings not long ago. So far off-base were the rating agencies' recent opinions of various packages of junky debt that now the U.S. Securities and Exchange Commission and various other regulators are on their case with serious investigations. And investors in the bond market simply don't trust them any more. Can't say as we blame the investors; they also got burned by bum ratings from the same "experts" in the Enron scandal. A high Moody's or S&P rating doesn't mean anywhere near what it used to, and for good reason.
Even if you're willing to get past that, you need to consider the impact on Portland of the sudden crisis in the bond insurance market. Many of the bonds Portland has sold in recent years have received top ratings only because they were insured by an outfit called MBIA (once known as the Municipal Bond Insurance Association), which guaranteed that the bonds would be fully paid when due. Look at the prospectuses for the city's recent bond offerings -- many are touting MBIA insurance on the front page. Here, and here, and here, and here, for example. Alas, in recent years MBIA and some of its competitors (whom Portland has also bought insurance from) took some ill-advised flyers guaranteeing risky private debt that has now gone bad, and an MBIA insurance policy doesn't mean nearly as much as it used to, again with good reason. Indeed, without a bailout from someone like Warren Buffett, the house of cards known as MBIA could well collapse.
Meanwhile, Portland continues to rack up "interim" debt for urban renewal pork that will have to be refinanced in three to five years. Who knows what kind of credit Portland will have then, or even what its credit is now? (A couple of new bond issues have just recently been listed as scheduled for April, and I suppose we will see then more about what's what. Curiously, however, a previously announced bond measure for emergency facilities has disappeared from the radar screen.) If nobody trusts the rating agencies, and the bond insurers' promises don't mean jack, the interest rate on a lot of that $4.6 billion of long-term debt that city taxpayers are staring at is going to be mighty high.
I keep talking about a municipal money crisis. No one in power is listening. Indeed, the City Council members keep crowing about all the extra money they have lying around. "Where should we put the new streetcars?" It's all fake, folks. When is the city going to wake up? And is it already too late to avert a disaster?