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Monday, March 24, 2008

City of Portland to borrow $750 million in April

With the municipal bond market going through unprecedented gyrations, it's a scary time for state and local governments to be borrowing money. But hey, this is the City of Portland, and racking up the debt is one of the things we're really good at.

And so the city hopes to issue three different sets of bonds in April: $50 million in long-term "urban renewal" debt for "downtown waterfront" projects; $150 million to refinance some highly toxic adjustable rate debt that the city took out nine years ago to fund civilian employee pensions; and a whopping $550 million in sewer debt, some of it refinancing (including $150 million that's being converted to fixed interest rates from five-year-old adjustable rate bombs) and some of it new borrowing.

The sewer bonds are scheduled to be sold on April 3 -- a week from Thursday. A bit surprising, then, that there's no offering document posted on the city's website yet. Perhaps it's going to be a "private placement," where there's no disclosure document at all, like when the city borrows hundreds of millions, ever so quietly, from Bank of America.

Three quarters of a billion, all in a month. And at a time when bond insurance, on which the city has regularly relied to keep its bond ratings high, is pretty much not worth what you'd have to pay for it. All sorts of governmental and nonprofit players around the country are scrambling for fixed-rate debt right now, and the laws of supply and demand dictate that interest rates are going to be substantial as a result. This ought to be quite interesting to watch.

Meanwhile, the city has also gotten around to posting a series of disclosure documents, dated March 1, 2008, relating to bond issues that are already outstanding. They're here. You may smell smoke, but I doubt you'll find the gun.

Comments (3)

Jack, do you have a feel for how long this can go on? Given the City's seemingly unlimited taxing authority, is there any point at which either no one will lend money at any price or the City will be unable to meet its obligations?

I tried very hard to get the city to pay attention to this issue 5 years ago when the financing was good and cheap. Nobody would listen. It was like the dot com craze down at City Hall. Portland had solved the ancient riddle of the business cycle. Build and they will come. We'll grow our way out of it. Portland is different and immune from international finance concerns. The opportunity cost of taking the cheap way out with adjustable financing is now becoming apparent.

That "highly toxic" debt, by the way, was Vera's quick fix to the PERS problem at the time. Adams was her chief of staff.

It seems Portland is destined to fall into the same predicament as N.Y.C in the mid 70's when it was forced into bankruptcy.
One would have to think that Vera Katz had been using N.Y.C.'s mayor Abe Beame's playbook.

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