How to borrow $277 million from B of A, very quietly
Did you know that over the last month or so, the City of Portland has borrowed another $11.7 million for use in four of its urban renewal areas?
We can understand if you didn't. The money was advanced by a bank, and city officers signed the I.O.U.s, without public notice. There was no City Council discussion of these transactions, nothing in the papers or on the tube, and no mention of them whatsoever on the city's website. It was all done quietly by bureaucrats, with only maybe a dozen city insiders even aware it was going on. For a city that wins awards for its supposed financial transparency, it is a bit surprising.
The bonds were sold without public participation or public bidding. Bank of America bought the whole $11.7 million, adding to $97.9 million of other money that it has lent to the city for urban renewal since 2002 -- again, all in highly private, negotiated deals, without a public offering of the bonds. All $109.6 million of B of A debt is still outstanding. The interest rate floats with the B of A prime rate -- as of Wednesday, the city was paying interest at an annual rate of 3.29 percent -- and that comes to around $3.6 million of interest a year. Unlike much of the city's debt, the interest on these bonds is not exempt from federal taxes, and so the bank charges a higher rate of interest than it would have charged if the interest were fully tax-exempt.
And there's plenty more where that came from. The city is planning to borrow as much as another $167.4 million on these terms over the next three years. All of that debt will have to be paid off, or much more likely refinanced, by the end of 2010. The "full faith and credit" of the city is behind the bonds, which means that the city's taxpayers have already agreed to pay the $109.6 million, come hell or high water. It's a revolving line of credit, meaning that the city can pay off some of the debt and come back and re-borrow it; so long as the balance never gets above $175 million at any given time, the city can borrow up to $277 million total.
These and other interesting but little-known facts were uncovered when we recently undertook to examine the city's practice of using "short-term" lines of credit to finance its urban renewal projects. Back in September, the City Council noticed that the existing lines of credit that the city had available for urban renewal pork were going to run out as of December 30, and so the council authorized extensions and expansions of the lines over several more years. Back then, the balance stood at the $97.9 million, but the council, at the urging of the Portland Development Commission, authorized the new line to run as high as the $277 million. We kept watching the city's website for information about the new line of credit transaction, even openly asking about it on this blog, but not a word appeared. As it turned out, the city quietly closed the deal in mid-December, and we got the details when we asked for them directly over the last couple of weeks.
A couple of features of the city's maneuvers are especially curious. First, although this debt is classified as "short-term," some of it is anything but. Some of it has been hanging around for five years or more:
The city debt manager, Eric Johansen, gave us this explanation for the practice of borrowing based on "short-term" obligations:
The lines of credit will be repaid from the proceeds of long-term urban renewal and redevelopment bonds to be issued by the City over the next several years. It is the City's normal practice in urban renewal areas to pay for project costs from line of credit borrowings for several years and to then refinance those balances into long-term bonds when the balances are sufficient to make long-term financing cost-effective.With the balance at $97.9 million, and $18.7 million of it aged around five years, one would have thought that the "balances were sufficient" for long-term, rather than more "interim," debt, back in 2007. It almost makes one think that the city is deliberately stalling on biting the bullet and issuing permanent bonds. Why the city would do this is anyone's guess. The permanent bonds will likely be subject to greater scrutiny than the short-term "lines of credit" were, and they'll presumably be sold in a public market rather than quietly placed with a bank. Does that have something to do with why the long-term financing is taking so long?
Another troubling aspect is the process by which this kind of debt winds up on the city's books. The City Council, when it authorized these lines of credit, said precious little about how the money would be spent. The council designated which urban renewal areas the money would go to, but as for the specifics of the spending, there was nothing in the council resolution or much by way of discussion. And indeed, there couldn't be -- some of the money wouldn't, and still won't, be borrowed or spent for many months. The specific spending plans for much of those funds were rough budgets at best back when the council took action -- some probably still are today.
But once the council gives its blessing to the line of credit, that's the last the public hears about the debt. No further council action is taken before some City Hall functionary signs an order for more money, which he simply ships to B of A. The next thing one knows, the $97.9 million debt has grown to $175 million, without any further public discussion or debate.
Now, when the City Council authorizes the issuance of bonds, in theory voters have a brief period in which they can object. An ordinance authorizing bonds can be referred to a public vote by petitions gathered within a brief period after the ordinance is passed. Thus, back in September, in theory the electorate had a chance to object to the issuance of the "short-term" bonds. But as was just noted, at that point the plans for the spending of the debt proceeds were extremely sketchy, some of the bonds would not be issued for years, and it would have been hard for the public to judge whether the projects were worth supporting or opposing.
Presumably, the voters will get another chance to object to the permanent, long-term bonds when the city authorizes them over the next few years. But let's face it: When the "interim" bonds mature and have to be repaid, there isn't going to be any cash lying around in the city coffers to pay them off. And so at that point, the only options will be to issue permanent debt or have the city go into default. No one is going to vote to have the latter happen, and so any opportunity to vote on the permanent financing will essentially be meaningless. Any "decision" will be made with a gun to the taxpayers' head.
In sum, the public's right to object to the city's borrowing more money for urban renewal projects is clearly hampered by the "interim" financing maneuvers. When the council passes the first ordinance, it's too soon to tell what you're opposing; when it passes the second ordinance, it's too late, because the money's already been spent.
Another interesting aspect of the December 2007 transactions -- in which the $97.9 million was refinanced and the additional lending commitment made by B of A -- was the process by which a lender was selected. Johansen from the city explains it this way:
In October 2007, the City issued a Request for Proposals (RFP) to provide lines of credit for the City's urban renewal areas. The RFP was sent to nine financial institutions and the City received proposals from three firms: Bank of America, Wells Fargo and U.S. Bank. The proposals were reviewed by City staff and Bank of America was deemed to have the most cost-effective proposal.The RFP and responses (actually, the third was from KeyBank, not U.S. Bank) make for some wonkishly enlightening reading. At first, the city wanted the banks to agree to lend on a nonrevolving basis up to $277 million -- that is, the city would be allowed to borrow up to $277 million (including the refinanced $97.9 million) before it paid any of it back (except for interest). This would have allowed the balance to go as high as $277 million at any given time. Only B of A was willing to accommodate that request -- Wells Fargo and Key Bank said they could not go that high, and for them, the balance at any given time couldn't be higher than $175 million. At that point, the city gave B of A a chance to re-propose a deal based on the $175 million cap. It did so, and the city gave the deal to B of A.
Since the lines of credit were placed directly with Bank of America and were not part of a public securities offering, there was no official statement or other disclosure document prepared for the transaction.
The interest rates offered by the three banks were:
|B of A (revised)||Prime minus 2.71%|
|KeyBank||Prime minus 2.63%|
|Wells Fargo||Prime minus 2.5%|
All three banks also offered the city an alternate interest rate option based on the well known LIBOR rate published by the British Bankers Association.
Anyway, given the chance to re-bid based on the $175 million balance ceiling, B of A offered the best deal, and the city bought it. However, it took quite a while for the deal to close. While the city's request for proposals called for a late October closing date, the deal dragged on until almost Christmas. There has been no official word on what caused the delay. Indeed, the $97.9 million of "interim" debt that the city had outstanding at that point was already owed to B of A, and so that institution should have been intimately familiar with the city's ways. What took two months to resolve in order to close the refinancing and new credit line is anyone's guess.
The contract by which the new line of credit was extended is surprisingly short -- almost casual for a deal of this size. And according to Johansen, the city did not disclose to the bank any financial information beyond its audited financial statements of June 30, 2006 and its current budget:
There were no other specific financial statements or other disclosure documents provided to Bank of America in connection with the lines of credit or related transactions. However, the City routinely provides the bank with copies or electronic links to Comprehensive Annual Financial Reports and Adopted Budgets for the City and the Portland Development Commission.Wow. You lend $277 million based on financial statements that are 18 months old, plus budgets? No wonder the bond market's in the tank.
In sum, our examination of the "interim" lines of credit for Portland urban renewal didn't make us any warmer or cozier with the path of fiscal deterioration on which the city is embarked. Like everything having to do with the urban renewal juggernaut, there's a strong fishy odor about the whole thing -- at best, some questionable policymaking.