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Tuesday, April 15, 2008

More on the squelched Portland bond deal

We blogged yesterday about a City of Portland refinancing bond deal that went from scheduled to indefinitely postponed, as of last week. We wondered why, and we asked the city's debt manager, Eric Johansen, for an explanation. Here's our question and his answer:

bojack: What caused the proposed $150 million pension refunding bond to be postponed? Are the auction rate securities that are supposed to be refunded still outstanding? When was the last interest rate reset on those, and what is the interest rate currently? Did the most recent auction of those securities succeed?

Johansen: The proposed conversion of the City's outstanding $150 million of pension obligation bonds has been postponed for market reasons. The City was not satisfied with the level of interest rates being proposed for the taxable, fixed rate refunding bonds and has elected to defer the conversion until market conditions improve.

The auction rate securities proposed to be refunded with the proceeds of the pension obligation refunding bonds remain outstanding in seven-day taxable mode.

The outstanding auction rate securities are repriced on Monday and Wednesday of each week. The interest rate on today's pricing was 3.302%. Today's rate was determined based on the failed auction formula equal to 150% of the daily 7-day AA financial commercial paper index.

While we were up, we asked a few additional questions about some pending bond offerings that we have been following:

bojack: Have the sewer bonds sold at auction on April 3 closed yet? Who bought them, and at what interest rates?

Johansen: The City's First and Second Lien Sewer System Revenue and Refunding Bonds, 2008 Series A and B sold through competitive bidding on April 3rd. The final amounts of the Series A and Series B Bonds were $333,015,000 and $195,700,000, respectively. The Series A Bonds were purchased by Lehman Brothers at a true interest cost (TIC) of 4.3675%. The Series B Bonds were purchased by Citigroup at a TIC of 4.6087%.

Closing is scheduled for April 17th.

bojack: Have terms been reached on the downtown urban renewal bonds that were set to be sold on April 10? What are those terms? When is that issue expected to close?

Johansen: The $50,615,000 Downtown Waterfront Urban Renewal and Redevelopment Bonds, 2008 Series A (Federally Taxable) sold last Thursday in a negotiated sale with Citigroup and Banc of America. The TIC on the federally taxable bonds was 6.0278%.

Closing is scheduled for April 22nd.

Hmmm... Some of that last set of bonds -- the urban renewal bonds -- is a 10-year loan, and most of it is a 16-year loan. At 6.0278 percent interest, the first year's interest alone is something like $3 million. We certainly hope that whatever toys we're purchasing for the downtown and developer set are worth it all.

Comments (12)

6+% and I'm damn lucky to get 3.5% on a CD. Well the old saw is correct again. "The rich get richer"

"Downtown Waterfront Urban Renewal and Redevelopment Bonds, 2008 Series A (Federally Taxable)"

I didn't know they had taxable bonds for these projects. Is that for any particular reason? It seems like they'd want to call these tax-free to get a lower rate?

As to proceeds from the earlier pension obligation bonds: How much remains, notwithstanding the apparent off-budget treatment of them for purposes of complying with the Local Budget Law?
See page 45 of this report for one view of the interplay between UALs and those proceeds.

See OAR 459-007-0530 Crediting Earnings To Employer Lump-Sum Payments

These are not employee accounts. If Portland has the opportunity to pay off the outstanding balance as part of a refunding then surely the bondholders could accept repayment from the Employer Lump-Sum accounts; were Portland to demand return of the balance for that purpose. Employers were not compelled to issue such bonds. Employee objections to return of the remaining balance would be no greater than their inability to compel the issuance of the same originally or presently. That is, the refunding, if the option exists to repay the outstanding bonds from the prior proceeds, should endure no less scrutiny than that for the original issuance.

It would be nice to at least know the present balance in the off-Local-Budget-Law-balance-sheet accounts. It is certainly worth a footnote reference in the forthcoming budget.

At 6.0278 percent interest that far exceeds the "estimated" debt service costs of that particular Urban Renewal plan. Throwing futher into fiscal disarray the mission of PDC.
Now, besides widespread project overruns they'll have to get Sam Adams to find millions more in outside money to cover increased debt service costs.

Jack, how does this impact the individual debt load for the lucky residents of Pottertown?

"Jack, how does this impact the individual debt load for the lucky residents of Pottertown?"

Allow me,,,,,

1) This means the PDC/Portland will take many millions more from basic services over decades to cover the rising costs of Urban Renewal agreements without getting anything more than original schemes detailed. Whick makes the Wheeling and Dealing even less productive for the public.

2) There is no question many millions will also have to be taken from other sources further diminishing the ability to fund other legitimate and worthy needs in Pottertown.

3) SoWa will make all others look like minor snafoos.

Thanks for posting these details Jack!

I am still curious about the Waterfront Urban Renewal Bonds being federally taxable as was Steve above. Has Portland Development Commission or city of Portland run into some federal limit on urban renewal bond amounts? Or is there a private business component to the Waterfront Urban Renewal that disqualified it for federal tax free treatment. Maybe the purposes of this particular bond issue does not meet federal criteria for tax free treatment...guess that goes without saying. For someone in the 25% marginal federal income tax bracket, the after tax yield is in the same ball park as the other debt or about 4.5%. The only difference is for the seller, or PDC/COP. It must cough up another 150 basis points in interest expense.

I have neighborhood bicycle enthusiasts who are flying the Sam Adams' lawn signs because of his promotion of bicycling. But they don't have the foggiest this Commissioner and other Commissioners have been running up the city's "credit cards" piling up debt on us all. La La land isn't just in California anymore.

I can't see what the City is anticipating that would indicate more favorable market conditions on the horizon. Not only was the original variable financing a stupid decision, but this is too. Bite the bullet and take the pain. The risk of interest rates moving higher is too great. Despite the Feds rate cuts, all the market pressure is upward. It's only a matter of time.

"the City is anticipating that would indicate more favorable market conditions on the horizon."

If you can wait, I think credit conditions will get more favorable than today.

Most of the big banks have been not popping surprises lately (like the last month or so) compared to start of the year when they were mentioned a ton of write-offs.

Of course, this week is Q1 reports for most of them, so that may change.


Ok so the City of Portland has some old PERS payments it didn't make when they should have and now has to make them up. They can "borrow" from PERS at 8% or they can borrow in the open market at 3%, or 4%, or 5% or whatever. They decided to borrow on the open market.

So I guess you are saying they should pay these old missed payments out of cash on hand? Or should borrow from the State at 8%? Or show these things as debt? Which they don't do now?

I guess I am missing your point.

Greg C

I am not in favor of issuing bonds to deliver the proceeds to the OIC to help them deliver it to folks like TPG to buy stuff like WaMu -- specifically as to "employer" accounts.

Your reframing of the question is just bizarre.

"238.600 System established; legislative intent. (1) [. . .]
(2) If the Public Employees Retirement System is terminated, or if contributions may no longer be made to the system, each member of the system has a nonforfeitable right to the benefits that the member has accrued as of the date of the termination, or as of the date that contributions may no longer be made to the system, to the extent that those benefits are funded."

Greg, you need only picture that there is one set, and only one set, of state laws applicable to any trustee of other peoples money. PERS is declared "independent" after all specifically so as to escape the constitutional prohibition on the government taking an interest in private investment ventures.

If I represented Portland, the citizens of Portland, I could demand that each employee annually sign a document that they have been fully paid for their work in the past year. And they have. Is it your position that there are terms of pay that were not calculated and not even considered contemporaneously at the time of such work and pay? If so, how can it become part of any valid contract? It can't.

Suppose the PERB/OIC only made conservative investments (t-bills and the like, such as those of insurance companies to cover fixed annuity payments, and as applicable and allowed for the federal Pension Benefit Guarantee Corporation) and they had to be fully funded contemporaneously with each employee's pay check. The funding level to cover hoped-for payments would be much, much higher than the present contributions from the employees to their own private accounts. If at the time of your pay you are willing to accept a lower funding level so as to gamble on higher returns from non-conservative investments that is entirely your own business, not mine. Opt out, or demand that your mandated 6 percent be placed in t-bills and the like -- I would have no objection to this at all. It would be in your own self-interest, and mine too.

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