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Friday, June 20, 2008

How government works: Borrow at 6% to invest at 3%

To close the loop on our stories on the planned move of the west side offramp from the Hawthorne Bridge, we hear from the folks at Multnomah County that the $8.9 million that the county received from the City of Portland for that move is safely invested, and will remain so until the county spends the funds, one of these days. The money is earning around 3.1 percent as part of the county's investment portfolio, which we are told is made up of this:

Cash and Equivalents44.4%
US Government Agencies18.5%
Collateralized Certificates of Deposit 15.8%
Corporate Debt and Commercial Paper 10.2%
Bankers’ Acceptances7.6%
US Treasuries3.5%

The problem for the taxpayers, of course, is that the city's paying around 6.03 percent interest on those funds -- they're all borrowed as part of the "urban renewal" red ink fest and have been incurring interest at that rate since April -- while the county's earning only 3.1 percent. It's a spread of 2.93 percent, which on $8.9 million comes to $260,770 a year. That's money that you and I are paying to Citigroup and Bank of America... and until the county starts moving that ramp, we are getting absolutely nothing for it.

Comments (8)

Oh Jack, you just don't understand the complexities of Urban Renewal TIF financing.

But not to worry, PDC chief Bruce Warner just got a big raise so he'll be soon re-explaining it to us.

Of course that will do it and there won't be any open books review, audit or clarifications for the public or city council.

If there were we would find that this upside down "investment" is a tip of the melting iceberg.

Funny thing here is that this money would be better put to use on any current Urban Renewal project or pulling it back to service the huge debt it helped create.

I could do better than 3.1%. You can get over 4%, federally insured, for a 2 year term CD (probably not too long a term given the speed of government action). You would have to spread it around to numerous different banks because of the 100k account limit, but I think I could earn an extra point just as safe as this rate. Moreover, you might be able a to get significantly more than 4% if you go to a fixed annuity guranteed by life insurance companies. Oh well, guess we're getting at least some partial offset to the borrowed interest costs. Sorry about the arm chair quarterbacking, and it sure beats a few cases where local government went to derivatives to stretch the yield.

5.25% US Bank
Now Jack, being a man of numbers you know they can make it up with volume, the tax-payers are a lot of volume.


I don't think we are getting anything back. The CoP borrowed the money at 6%, and MultCo has it invested at 3%. Do you think MultCo is sharing any of that 3% with CoP?

Why doesn't CoP just pay MultCo the 3%, and we will just call it good? (It would save the CoP tax payers 3%.)

Why doesn't CoP just pay MultCo the 3%, and we will just call it good?

Because then the banks wouldn't be making any money.

Where is Mildred Schwab when you need her?

It's even worse. Your article doesn't assume there is any inflation. We all know that inflation is at least 6% (just look at gas and food prices) and so your real rate of earned interest is really 3%-6%= -3% . So, really, they took out a loan to earn a NEGATIVE rate of interest. Bridge financing issues are complex but I don't think they really understand "money".

Government doesn't need to "make" money to survive, it merely needs to increase it's tax base.

So long as incumbent City and County Commissioners get reelected, the go along to get along system of local government is deemed a success.

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