Portland sewer debt climbs 21.63% over 13 months
As noted here yesterday, the City of Portland is going to borrow more than $550 million for its sewer system next week. And the sales document for the bonds (the "preliminary official statement") hit the internet yesterday -- just about the time we complained on this blog that it was well nigh time to release it.
Unlike lots of prior city sewer bonds, these are scheduled to be sold without the benefit of a bond insurance policy -- inevitably, in light of the fact that the big bond insurance companies have become so shaky in recent weeks that investors aren't much impressed by their policies any more. This means that unlike the AAA credit ratings that several prior Portland sewer bond issues have enjoyed, these babies are going to go off at substantially lower ratings. About $340 million in bonds, with a first mortgage on the sewer system, have been rated Aa3 by Moody's, and AA- by Standard & Poors. The other $214 million or so, with a second mortgage, have been rated only A1 by Moody's, and AA- by Standard & Poor's. There's more on the rating systems here for Moody's and here for S&P, but Aa3 is several notches below Aaa at Moody's; A1 is the next level below that; and AA- is several notches below AAA at S&P. Lower ratings mean higher interest rates. (The ratings on the new bonds are the same as the city's sewer bonds have had for a while, if they were uninsured.)
When the city sold a set of insured sewer bonds in early 2007 -- back when bond insurance still meant something -- it got rates of between 3.6 and 3.725 percent on money it borrowed over eight years. The terms of the new bonds will run up to 25 years, which will also tend to bump up the interest rates. The city says if it can't get the money at 6 percent a year interest or less, there will be no sale this time around. Keep in mind that interest on these bonds is exempt from federal and Oregon income taxes, and so buying a Portland bond at 6 percent would be like buying a corporation's bond at something like 8½ percent.
Of the $554 million of new bonds, $150 million will be used to pay off "auction rate" (adjustable rate) bonds that were issued in 2003. The interest rates on these have gone through the roof since the first of the year due to the fall of the bond insurance companies; the city is pretty much up against the wall to get rid of them. They're planning to use another $117 million of the new bond proceeds to pay off some older bonds, part of a large sewer borrowing back in 1998. That's $267 million of refinancing, leaving $287 million of new money to spend on the sewers.
It's interesting that the city is planning to pay off the 1998 bonds. According to this document, the interest rates on those bonds run from 4.5 percent to 5.13 percent. Given that the interest rates on next week's bonds could run higher than that, one wonders why the city would borrow now to redeem the older ones.
The new bonds are to be paid off solely out of sewer bill revenues, and so there isn't much in the offering document about the city's tax structure or, of greater interest to us, about its outstanding overall debt load. One might have thought that that information would be material to the purchaser of the sewer bonds, but the city fathers think otherwise. They attach the city's audited financials as of last June 30, and we guess they figure that's enough about the balance sheet.
Another topic one might have expected to see covered in the offering document is the proposed referendum this fall in which voters are supposed to decide whether they wish to have an additional $55 a year or so in taxes (or "user fees," even if you don't use it) tacked onto their sewer and water bills for street maintenance. If we were a prospective bond buyer who was supposed to be paid out of sewer bills, we might like to know about other items that are going to get piled onto those bills. If a bill is only partially paid, which charge will be treated as being paid first?
In any event, the information spelled out in the new document reveals that the city's debt continues to jump sharply. After the new sewer bonds are issued next week, the mortgages on the sewer system will stand at $1,476,925,000 -- nearly $1.5 billion. In March 2007, when another set of sewer bonds were sold, the tally was only $1,214,230,000. That's a 21.63 percent increase in 13 months.
Now, on our debt clock in the left sidebar of this blog, we've been increasing the city's long-term debt at an assumed rate of just 5.18 percent a year -- apparently too conservative an estimate. Perhaps we will have a better handle on the current overall debt figure when the offering document is released for the city's upcoming $50 million in new, long-term "urban renewal" bonds. That should be out in a week or so, and since property taxes are involved, a more comprehensive debt picture should be included.
Meanwhile, there's more sewer debt on the horizon as well. The city says that it will likely go to the well for another $344 million of long-term loans in 2009-10, and another $140 million in 2011-12. Between our sewer bills and our property tax bills, we'll be paying for the rest of our lives on the money we're spending now. Good thing we're spending it all wisely. Go by streetcar!