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Monday, February 8, 2010

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.

Comments (22)

Surely the specific items to be funded by the bond have to be listed publicly somewhere, right? Either in the authorizing ordinance or the bond-offering documents?

If not, that's a travesty and worth a citizen referendum to force full disclosure of these types of backroom dealings. Or some sort of executive order from Sam requiring it (that would be one thing he could do to start winning back some of our respect).

Maybe every penny of that $73 million is justified, but we as taxpayers should have the right to see an itemized list of the proposed projects. I'm sure they're in an Excel sheet on some Water Bureau staffer's computer and could be attached to the ordinance or offering docs with a few extra mouse clicks. It's absence only adds to the suspicion (perhaps justified, perhaps not) that they're hiding something. A big PERS payment, perhaps?

In the meantime, where can I buy some of those bonds? Considering interest rates right now, 4% tax free is not too shabby. I like to follow Warren Buffet's maxim of buying stocks or bonds in companies whose products or services you use every day (I am a PWB ratepayer). If my rates are going to go up to pay for this bond, at least I can try to get a small pittance back.

I would not rush to buy an Oregon muni at less than 4%, especially if it matures in 20 years. Municipalities all over the country have been running to issue debt and take advantage of very low interest rates. When this gravy train runs out, rates will jump higher. If they run up to 5.5%, these $1,000 bonds will be selling for about $725. A hefty loss.

We know rates are going to up eventually and with the US borrowing at a rate equal to 11%, the outlook is not good. Look at Portugal. They had to actually pull a bond offering because of there were not enough buyers for their sovereign debt --- and their debt is 9% of GDP.

Either in the authorizing ordinance or the bond-offering documents?

The bond offering documents has some details, but the ordinance on which a referendum would be voting has none.

In a complaint-driven municipal system, there is no problem if there is no complaint.

The foes of reservoir replacement have been complaining about this for years now. Obviously, their complaints are greeted with contempt.

If backed into a corner, they will just say that the dough is to fund "green" projects and to "create jobs".

With all the vagueness of the money's stated purpose, what is to stop them from using it all to award a no-bid contract to Paulson's company for that Tanner Creek sewer issue under the stadium? Maybe this was the real underlying issue and the rest was all a distraction all along?

"the city will officially be a wholly owned subsidiary of Bank of America."

To be fair, most banks buying these bonds are just buying them for inventory to re-sell, so I don't think it matters much if it is BAC, WF or Citi.

"That could mean just about any building, installation, or piece of equipment imaginable, couldn't it?"

You mean like solar panels or green houses or maybe bigger servers for the blog? PWB is Randy's toy set now.

Realize that the Water Bureau is Randy's main profit center now that BDS has tanked. In addition, they can ram thru a rate increase anytime they want (even when PURB says they are wasting money and NO to the water rate increase they just did.)

I agree with Jack on the vagueness and lack of clarity which precludes citizens from petitioning for a vote. Due process and transparency?? what's that??

Maybe an enforcement order from the judge is necessary.

Then once the specifics are disclosed voters could petition for a vote decide if this is what they want. But then this is why no details were included in the offering.

The Water Bureau last spring did very much this same thing and neither they or OMF would disclose just what the proposed funds would be used for. More generalizations so voters could not petition.

You can expect new bonds for each of the next five years at least, as they shutter the reservoirs, build the filtration plant, and add that mixing center on Powell Butte. According to their own documents, Well water, Columbia River water, and Willamette River could and may be mixed here for distribution. Yummy.
Hold the pesticides, hormones, and valium please.

If OMF will not perform as required who will?

Wasn't there a recent proposal by Dan Saltzman to fund the bike plan with water revenue?

Someone would have to sue the city to unwind this bond deal. What water customer has the time and resources to invest in a lawsuit? Perhaps there's a lawyer out there who wants to file a class-action suit on behalf of all water customers?

"Someone would have to sue the city"

Name me the last person (besides really egregious personal injury) that won a suit against CoP.

It's the government, they don't have to answer for their actions, legal or otherwise.

Name me the last person (besides really egregious personal injury) that won a suit against CoP.

Friends of the Reservoirs won this suit in 2003. Some other group could very well win it now, but no one seems to care. Vera Katz and her boy Sam Adams will soon have led Portland straight into oblivion. But hey, we got food carts and streetcars.

Was the judge Marilyn Litzenber? I believe so and she is the best judge for the fourth district.

Yes, Marilyn Litzenberger was the judge. Us citizens need an angel to step up to the plate AGAIN and call these crooked bureaucrats out for their shady dealings. Our sustainable, safe Bull Run water system is on the verge of getting needlessly hacked up by our bully City Council and their sleazy cohorts at the Portland Water Bureau. Please help.

The Water Bureau mentions that the rates are going up to $41/mo by 2015 but that's with only 36% of the debt they plan between now and then being issued. They want to issue $507M more bonds by then. At that rate, I estimate res. rates will have to be $114/mo to support the debt service. It will then be a Catch 22, if politicians don't want to do it, & the debt doesn't get paid, then whatever is collateral will come into effect, or the city will have to sell it (the water system) to pay off the debt.

The students in Calif. found out how this works when the risky investments of the Univ. went south and the collateral was taken: all of their student fees.

How much will PPS water bill be going up as large users? Their bill is planned to be $91,241/month, doubling it. When you add in all the planned additional debt, how high will it go and where will they cut? What about businesses?

Maybe this will get the attention of people as to whether we need a UV plant. Why are they borrowing $800M+ if it only costs around $150m?????

Query: When a Multnomah County judge decides a case against the City of Portland, does the City of Portland retaliate by finding a way to cut Multnomah County funding, particularly court funding?

Interested Reader -

The City has nothing to do with Mult.Co. Cir. Ct.funding.

The Circuit Courts are funded solely by the State,i.e. the Legislature through appropriation from the General Fund, are a part of the Oregon Judicial Department (not Justice Department, which is the Attorney General), and all the folks at the Circuit Courts are state employees.

Water-using industries, such as beer and laundry, can aggregate enough clout in one alliance that the city could not take them all out at once during a recession. Bakeries and restaurants use quite a lot of water as well. It will have to be employers and service providers that take this on. It needs to be a class action, with the young in the middle and the big bulls facing out. The public will not want its neighborhood watering holes destroyed.

It's sad, but municipal bonds are looking to be in a bubble, for the reasons discussed above. They are tempting, but poorly advised in my opinion.

Thank you for your thorough research on this topic. Mounting a lawsuit against the city every time it pulls one of its water system shennanigans is time-consuming in the extreme. The way to control the city is to make the law that governs the city. The way to make the law is to use the initiative process to change the city charter. Anything less than that is no different than being a gerbil in a squirrel cage. Citizens have to fight the same fight over and over and over -- and guess who runs out of hope, energy and resources first?

Thanks for bringing this issue to the public. I don't think lack of caring is the problem; organizations like Friends of the Reservoirs have been largely left to shoulder the burden of public oversight for our drinking water. It's just too much work for these volunteers to do alone... at any given moment there are a dozen infractions just like this one needing attention, all of which I care about. Hopefully, one of your readers will take up the ball and run with it for a few months. PWB will defy the judges orders again when they issue the next bond, and it'd be great if the public was ready to hold them accountable.

PWB is set to insure that none of today's volunteers can accumulate as much knowledge as Friends of the Reservoirs volunteers now has. No one will ever be allowed to sit all day, everyday, for weeks on end in the PWB library reading long range plans and consultant contracts. FoR volunteers did this once, and that experience continues to offer citizens great insight. Today, PWB charges citizens $28/hour to sit at PWB and read documents... if FoR had been charged for their time in the library, they'd have had to fork over close to $7000. It's never been harder to be informed.

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