Portland water bonds sold, but were they legal?
The City of Portland sold around $73 million of bonds last week to raise money for use by its water bureau. The winning bidder in the competitive sale was Banc of America Merrill Lynch. The city sure is into borrowing money from Bank of America these days; it was also groveling before that institution last week for a short-term loan of the $12 million it needs for the senseless re-renovation of PGE Park for major league (by U.S. standards) soccer. Pretty soon, it seems, the city will officially be a wholly owned subsidiary of Bank of America.
The total interest cost on the water bonds was 3.9322% a year, and a good chunk of the money is due in a final balloon payment in 25 years. Given that interest on the bonds is exempt from both federal and Oregon income taxes, 3.9322% is a great return on investment for B of A, or whoever ultimately buys the bonds from B of A. Assuming a 35% combined state and federal tax rate, that is the equivalent of better than 6% interest on a taxable deal. And the city's promised to raise water rates as necessary to cover the mortgage payments. The authorizing City Council ordinance declares:
Rate Covenant. The City covenants for the benefit of the owners of all First Lien Bonds that are sold under the authority of this ordinance that the City shall, when the First Lien Bonds are issued, charge rates and fees in connection with the operation of the Water System which, when combined with other Gross Revenues, are adequate to generate Net Revenues at least equal to one hundred twenty five percent (125.00%) of Annual Debt Service due in that Fiscal Year, with the Additional Bonds treated as Outstanding....Whatever the wisdom of the massive, expensive borrowing may be -- a topic worthy of a post of its own -- an important question is whether the city followed proper procedures in issuing the bonds. Looking over the transaction, an argument can be made that it didn't -- that the process by which the bonds were authorized and issued violated state law. And it wouldn't be the first time that the city pulled such a stunt in connection with water bureau borrowing.
The ordinance authorizing the latest water bonds was passed back in December. It described the purpose of the bonds -- what the proceeds of the borrowing would be used for -- as follows:
The City now finds it financially feasible and in the best interests of the City to authorize the issuance and sale of revenue bonds under ORS 287A.150 to finance the additions and improvements to the water system that are described in this paragraph. The additions and improvements that may be financed with revenue bonds authorized by this ordinance (the "Capital Improvements") include additions, improvements, and capital equipment that facilitate supply, treatment, transmission, storage, pumping, distribution, regulatory compliance, customer service and support.That was it. The purposes of the bonds for the water system "include... additions, improvements, and capital equipment that facilitate supply, treatment, transmission, storage, pumping, distribution, regulatory compliance, customer service and support." That could mean just about any building, installation, or piece of equipment imaginable, couldn't it? It could be a new reservoir, a dump truck, squirting gargoyles, a target range for the bureau's soon-to-be-armed guards, or a stuffed moose head for the wall of the bureau chief's office. The City Council supplied an awfully vague description of the proposed use of the borrowed money; it encompassed virtually everything that the water bureau does, and virtually any kind of asset that the bureau could buy to do its job. And they even threw in the word "include," which opens things up even further.
That vagueness is where the legal question comes in. Back in the fall of 2003, a Multnomah County Circuit Court judge enjoined the city from selling bonds under a bond authorization ordinance that said merely that the city would be using the money "to finance facilities improvements, property acquisition and other public purposes." A troublemaking citizens' group known as Friends of the Reservoirs complained that this ordinance and its vague description deprived city residents of their right to petition for a referendum, which would have subjected the bonds to a popular vote. The judge agreed, on two grounds: (1) that the City Council abused its power by passing the ordinance as an "emergency" measure, taking effect without waiting for the referendum period (nowadays opponents have 30 days to collect signatures) to pass; and (2) that the description of the purposes for which the bonds were to be issued was too vague to give reasonable notice of what was going to be done with the borrowed bond funds.
Now, in the present case, the City Council did not use an emergency ordinance, and its description was arguably a bit less amorphous than the one stricken down in 2003. Moreover, since then the state law on cities' issuing revenue bonds has been rewritten. But the extreme vagueness of the latest description -- "for the water bureau to buy whatever assets it wants," more or less -- does not appear to provide the level of detail in the notice to the public that the judge demanded in the earlier case. It's still pretty much a blank check, albeit for a single city bureau. And if that's all the city has to say before it issues bonds, the citizenry's referendum rights are meaningless.
It would be awfully hard for someone seeking signatures on a referendum petition to tell from the Portland ordinance just what he or she was asking people to protest. Indeed, it would be awfully hard for anyone even to figure out that he or she wanted to start a referendum drive, since the ordinance gave no clue as to what type of "additions and improvements" the water bureau planned to undertake with the bond proceeds. Reservoir covers? A new dam? Solar-powered water meters? Neon signs? It could be almost anything.
If the public didn't get legally sufficient notice of the bonds' purposes back in December, what can be done about it now? It's not entirely clear, but the question seems to be an academic one, as neither Friends of the Reservoirs nor anyone else seems interested in going to see the judge again about this issue. One thing's for sure: There's too much gamesmanship going on with the City of Portland's bonds, and City Council members (on whom we all get to vote every fourth year) should cut it out.