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Thursday, July 10, 2008

Who's watching the watchers?

When we ask questions about whether the City of Portland is borrowing too much money, people like Mayor-Elect Sam the Tram always respond with some remark about the city's high bond ratings. Usually, these claims are exaggerated. The city doesn't have that great of a bond rating overall. Lately it's been borrowing tens of millions for "urban renewal" with a Moody's rating of Aa3 and interest rates higher than 6 percent.

But even if the city's ratings are relatively strong, they may not mean much. Even the Bush SEC can see that the rating agencies who pass judgment on corporate and government bonds are both understaffed and tainted by serious conflicts of interest. The pressure's on to give the borrowers the highest ratings possible, because the borrowers pick the agencies used to rate their bonds, and the borrowers pay the agencies' fees.

The SEC's report on this is pretty uncomplimentary. It's here.

Comments (11)

The City of Portland's ability to repay these bonds is going to look very different if the housing crash comes to Portland.

Not to mention the two government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, are still "AAA" rated despite the fact their stocks have fallen 30% to 50% in the past 5 days.

Together, they purchased 80% of all residential mortgages from the originating banks and thrifts in 2008.

Think how much harder it's going to be to get a mortgage if the originator has to carry it on their books until you pay it off. Do you think they'll still be offering 7% fixed rates for 30 years while inflation expectations hit 5% (or higher)?

When Congressmen, OFHEO (the GSE's Regulator), and the Secretary of Treasury are all lining up to say you're not insolvent, and your stock continues to plunge, there is clearly some room for disagreement: a "AAA" credit rating ain't what it used to be.

If Fannie and Freddie are nationalized (the most aggressive solution to a market panic), that would DOUBLE the size of the U.S. national debt. The dollar would decline sharply, and all of Mayor Tram's and PDC/Metro's redevelopment projects would skyrocket in price. Failure to do so would impact nearly every bank and credit union in the world (because they have all been incentized to buy Freddie and Fannie debt or mortgage backed securities).

If Wall Street and main street banks are reducing their outstanding debt (aka "deleveraging"), maybe Portland should too. Because the cost of refinancing that debt is going up, and property tax collections are likely going down.

...property tax collections are likely going down

Wishful thinking. Until one's real market value declines below assessed valuation, come November 15, we'll still see another 3% increase in assessed valuation - and hence taxes. And while the situation with RMV and AV depends upon a number of factors for an individual property, overall, we're not even close to crossover point.

I may not be a rocket scientist when it comes to finance, but, uh, once the bonds are sold, the value of the bonds is "someone else's problem", right? While changes in the bond rating may affect interest rates on future bond sales, it doesn't affect already sold bonds at all, right? Whoever bought those bonds did so with a clear understanding of their fixed rate of return.

I am curious where the bulk of this debt resides. Isn't a lot of it money for the very expensive, but very necessary sewer improvements to keep from dumping raw sewage into the Willamette River every time it rains?

As of A city deep in hock, 10 months ago, 70% of the debt was for revenue bonds on water and sewer projects, revenue that is not going away under any realistic scenario. How would Jack have funded the sewer project without revenue bonds?

Jack says:

"They can talk all they want about what each debt is secured by, pots of money, dedicated revenue, etc., but the plain truth is that taxes get paid by people."
but taxes do not pay for sewer and water! At all. You get a bill based on your usage. That's not a tax any more than my grocery bill is a tax, that's a fee for services rendered. Necessary, useful, reliable services at rates that reflect the cost of providing them.

Jack's characterization of the nature and scope of the City's debt uses big-looking scary-looking numbers. I wonder how those numbers translate to actual risk or cause for concern.

42.3% of the $5.074 BILLION of Portland city debt is for police and fire pensions, which will all have to be paid out of property taxes.


Of the other 57.7%, much of it is "urban renewal" financing, which also comes out of property taxes. It's carved up among various urban renewal districts, but it's all basically property taxes.

Yes, some of the debt is for sewer and water projects. That's "revenue that is not going away under any realistic scenario." Although this may be great for the bondholders, it really blows for those of us who live here, drink water, wash, use toilets, and want the water to drain off our roofs. In case you haven't noticed, our water and sewer bills are among the worst in the nation, and about to become among the very worst. They may not be "taxes," but the obscene bills for water and sewer are still an essential part of living in these parts.

You keep whistling past the graveyard if you like. I'm right about this. Sooner or later all this debt is going to make Portland a very unpleasant place to live. The interest rates are getting ugly. Not to mention the fact that much of it is being spent on useless garbage. Six percent interest so that we can build streetcars for Joe Weston? I call BS on that.

we'll still see another 3% increase in assessed valuation -- and hence taxes. And while the situation with RMV and AV depends upon a number of factors for an individual property, overall, we're not even close to crossover point.

Yes, but there will be lots more tax delinquency in this economy. And new bond issues put up for a vote don't stand a chance.

Agreed. But aren't delinquencies dealt with by the county simply filing a lien against the property, then selling the lien to a third party for most of the taxes owed?

On the other hand, there's got to be some equity left in a place to be able to put a lien on in the first place, and then to turn around and sell it. Guess you got me, Jack.

Plus, the collection expenses eat into the revenue collected.

That said, it's hard to see how property tax collections are going to go down by much. But the debts are going up, up, up.

"42.3% of the $5.074 BILLION of Portland city debt is for police and fire pensions, which will all have to be paid out of property taxes."

That number is outside the 3% annual limit? If you remember Randy's famous solution of 31 years of prop tax increase which are gonna fix this problem?

The voters of Portland passed this POS and again showed their acumen and financial aptitude as slightly less than Randy's.

Gee, it sure would be nice to have someone who knows what they are doing making decisions about CoP's $2B budget.

Maybe when Randy reads his life-changin expert-makin book of the month it could be a financial one.

The doomsday scenario is 10% to 15% unemployment, 5%-10% vacancies in single family housing, and another 20% to 30% decline in local real estate prices.

I don't know if bank owned homes pay property taxes, but I do know that fewer new homes get built/sold and added to the property rolls. And existing homeowners start slowpaying their property taxes.

And some of the PDC's "build it and they will come" condo projects won't be able to support their URA debt.

I'm with the blog on this subject--it makes me ill that my wife and I will be responsible for 20K of PDX debt--add to that 70K we owe for the Federal debt. Something is really, really wrong around here--nobody seems to give a rip.

And new bond issues put up for a vote don't stand a chance.

What? Why, Metro's got a $120 million measure on the ballot this November to "improve conditions for the animals" at the zoo. That's word-for-word the same line they used to sell the last measure - they just didn't mention that they were going to "improve conditions" for the big cats by getting rid of them all and building a salt-water aquarium there.

I'm sure the new measure will pass, since it's only to "improve conditions for the animals".

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