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Wednesday, June 25, 2008

Another day, another $44 million of debt for Portland

The City of Portland had a bond sale scheduled for yesterday, but now it's been rescheduled for next Tuesday. Did somebody not want the deal on their books until the third quarter, which starts that day?

Anyway, it's more insane borrowing for "urban renewal" -- this time for the "South Park Blocks" district -- kind of a misleading name when you take a look at the map. Did you realize that the Crystal Ballroom is near the South Park Blocks? Me neither. Even crazier, only about half the South Park Blocks are actually in the urban renewal district that bears their name.

The sales document for the new bonds, which are being sold privately to a group led by Citigroup and Bank of America, is here (a large pdf file). Just a little over $67 million will be borrowed, about half of which is supposed to be paid back within 10 years, and the rest maturing within 16 years. Around $35 million of the bonds will bear taxable interest, which will trigger a higher interest rate than the rest, which will pay tax-exempt interest.

Nearly $44 million of the borrowed money will go for new "urban renewal" toys, while about $23 million is earmarked to pay off similar bonds that the city sold in 2000. Of the new money, quite a bit is scheduled to go for housing:

Table 5
South Park Blocks Urban Renewal Area
(FYs 2007-08 through 2011-12)

Project CategoryAmount (2)
Commercial Development$ 3,875,000
Parks and Public Facilities4,800,000
Housing 24,238,483
Other (3) 643,542
Total $33,557,025
(1) The planned projects are based on the budget of the Commission, and may be changed in the future.
(2) Preliminary, subject to change.
(3) Includes bank fees paid from line of credit and staffing and indirect costs which will be allocated to projects based on final project amounts.

Source: Portland Development Commission

Hmmmm... $23 million to refund old bonds... $34 million for new projects that they're telling us about... That comes to $57 million. But hey, they're borrowing $67 million. I guess the extra $10 million is for art.

Actually, this particular urban renewal district is about to turn into a pumpkin soon -- the borrowing authority for it legally ends on July 23 -- and so it appears they're borrowing even more dough than they know what to do with before time runs out, just to have it around to play with later. But interest, of course, starts running immediately.

The bonds are rated Aa3 by Moody's -- far from a top rating, and just a notch above A1. The likely reason for this is that the bonds are payable only out of increased property taxes from the district. It's not a risk-free proposition for the banks and their investing partners. Good luck to them -- they may well need it. Unlike the 2000 deal, here's no bond insurance this time around, because... well, the bond insurance companies aren't much more creditworthy than the City of Portland these days.

Comments (11)

To cut to the bottom line, let me direct you to Jack's "City of Portland Debt Clock" over there on the left. It's gone up by nearly $700 in about four or five months.

So, these bonds have some risk for the lenders because maybe property values don't go up per plan ,or if property tax rate hikes are required, there's a chance an initiative petition could be launched and the rate hikes over turned. I like Portland airport muni revenue bonds better as an investor.

Thanks again Jack for staying on top of these stories. No one else is doing it.

It's great timing for the City, with two new office towers under construction within the district that will produce a hefty tax increment. I did note that the bond document identifies PSU as the largest employer within the district, but most of PSU is actually outside the district.

It's hard to see how $24 million of low-income housing is going to raise property taxes all that much.

A reader writes:

The area covered by the South Parks Block URA has shifted over the years. . . the amendment the city council is voting on today is the 10th amendment to the district since it was formed in 1985.

The powerpoint from the PDC for the Lents Town Center included a pie chart on what they plan to spend the money on . . . of $170 million in new debt, if my memory serves, roughly $30 million was for PDC staff and overhead services. The $10 million not detailed in the $67 million in South Park Blocks debt might be similar. But that's just a guess.

And they have to borrow $5 million separately for computers? Hmmmmm....

"appears they're borrowing even more dough than they know what to do with before time runs out, just to have it around to play with later."

Agreed, the interest market looks like its headed upward from here for the near future, so now's a good time to get money - at least for PDC.

Jack, do you know of any state or local government where debt is limited on a per capita basis, such as $8,000 a person? It seems to me that this would be a good way to keep gov't debt from going completely out of control. Or does any other large city have another debt limit device that works well?

I know we've had various property tax limitation measures here in Oregon over the years, but they don't seem to control overall debt very well.

I think that in the long run the tax limitations will put a damper on the borrowing, because there are going to be some defaults. For example, this particular bond issue doesn't look like a very safe investment to me. Of course, Moody's will call it investment grade, but those are famous last words.

Jack, I wouldn't be surprised that the extra $10 Million you calculated is mostly the hidden PDC administrative costs. In the next budget period for SoWhat there is over $18 Million in administrative costs. The $290 Million per year that taxpayers give the PDC doesn't cover these hidden "administrative costs" for each, eleven Urban Renewal Areas.

"$23 million to refund old bonds... $34 million for new projects that they're telling us about... That comes to $57 million. But hey, they're borrowing $67 million. I guess the extra $10 million is for art."

REmember when people used to re-fi to take cash out of their equity. PDC is doing the same thing, albeit on a larger scale.

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