How to borrow $277 million from B of A, very quietly
Did you know that over the last month or so, the City of Portland has borrowed another $11.7 million for use in four of its urban renewal areas?
We can understand if you didn't. The money was advanced by a bank, and city officers signed the I.O.U.s, without public notice. There was no City Council discussion of these transactions, nothing in the papers or on the tube, and no mention of them whatsoever on the city's website. It was all done quietly by bureaucrats, with only maybe a dozen city insiders even aware it was going on. For a city that wins awards for its supposed financial transparency, it is a bit surprising.
The bonds were sold without public participation or public bidding. Bank of America bought the whole $11.7 million, adding to $97.9 million of other money that it has lent to the city for urban renewal since 2002 -- again, all in highly private, negotiated deals, without a public offering of the bonds. All $109.6 million of B of A debt is still outstanding. The interest rate floats with the B of A prime rate -- as of Wednesday, the city was paying interest at an annual rate of 3.29 percent -- and that comes to around $3.6 million of interest a year. Unlike much of the city's debt, the interest on these bonds is not exempt from federal taxes, and so the bank charges a higher rate of interest than it would have charged if the interest were fully tax-exempt.
And there's plenty more where that came from. The city is planning to borrow as much as another $167.4 million on these terms over the next three years. All of that debt will have to be paid off, or much more likely refinanced, by the end of 2010. The "full faith and credit" of the city is behind the bonds, which means that the city's taxpayers have already agreed to pay the $109.6 million, come hell or high water. It's a revolving line of credit, meaning that the city can pay off some of the debt and come back and re-borrow it; so long as the balance never gets above $175 million at any given time, the city can borrow up to $277 million total.
These and other interesting but little-known facts were uncovered when we recently undertook to examine the city's practice of using "short-term" lines of credit to finance its urban renewal projects. Back in September, the City Council noticed that the existing lines of credit that the city had available for urban renewal pork were going to run out as of December 30, and so the council authorized extensions and expansions of the lines over several more years. Back then, the balance stood at the $97.9 million, but the council, at the urging of the Portland Development Commission, authorized the new line to run as high as the $277 million. We kept watching the city's website for information about the new line of credit transaction, even openly asking about it on this blog, but not a word appeared. As it turned out, the city quietly closed the deal in mid-December, and we got the details when we asked for them directly over the last couple of weeks.
A couple of features of the city's maneuvers are especially curious. First, although this debt is classified as "short-term," some of it is anything but. Some of it has been hanging around for five years or more:
| Fiscal year | Amount |
| 2002-03 | $18.7 million |
| 2003-04 | $2.2 million |
| 2004-05 | $4.1 million |
| 2005-06 | $30.7 million |
| 2006-07 | $35.1 million |
The city debt manager, Eric Johansen, gave us this explanation for the practice of borrowing based on "short-term" obligations:
The lines of credit will be repaid from the proceeds of long-term urban renewal and redevelopment bonds to be issued by the City over the next several years. It is the City's normal practice in urban renewal areas to pay for project costs from line of credit borrowings for several years and to then refinance those balances into long-term bonds when the balances are sufficient to make long-term financing cost-effective.With the balance at $97.9 million, and $18.7 million of it aged around five years, one would have thought that the "balances were sufficient" for long-term, rather than more "interim," debt, back in 2007. It almost makes one think that the city is deliberately stalling on biting the bullet and issuing permanent bonds. Why the city would do this is anyone's guess. The permanent bonds will likely be subject to greater scrutiny than the short-term "lines of credit" were, and they'll presumably be sold in a public market rather than quietly placed with a bank. Does that have something to do with why the long-term financing is taking so long?
Another troubling aspect is the process by which this kind of debt winds up on the city's books. The City Council, when it authorized these lines of credit, said precious little about how the money would be spent. The council designated which urban renewal areas the money would go to, but as for the specifics of the spending, there was nothing in the council resolution or much by way of discussion. And indeed, there couldn't be -- some of the money wouldn't, and still won't, be borrowed or spent for many months. The specific spending plans for much of those funds were rough budgets at best back when the council took action -- some probably still are today.
But once the council gives its blessing to the line of credit, that's the last the public hears about the debt. No further council action is taken before some City Hall functionary signs an order for more money, which he simply ships to B of A. The next thing one knows, the $97.9 million debt has grown to $175 million, without any further public discussion or debate.
Now, when the City Council authorizes the issuance of bonds, in theory voters have a brief period in which they can object. An ordinance authorizing bonds can be referred to a public vote by petitions gathered within a brief period after the ordinance is passed. Thus, back in September, in theory the electorate had a chance to object to the issuance of the "short-term" bonds. But as was just noted, at that point the plans for the spending of the debt proceeds were extremely sketchy, some of the bonds would not be issued for years, and it would have been hard for the public to judge whether the projects were worth supporting or opposing.
Presumably, the voters will get another chance to object to the permanent, long-term bonds when the city authorizes them over the next few years. But let's face it: When the "interim" bonds mature and have to be repaid, there isn't going to be any cash lying around in the city coffers to pay them off. And so at that point, the only options will be to issue permanent debt or have the city go into default. No one is going to vote to have the latter happen, and so any opportunity to vote on the permanent financing will essentially be meaningless. Any "decision" will be made with a gun to the taxpayers' head.
In sum, the public's right to object to the city's borrowing more money for urban renewal projects is clearly hampered by the "interim" financing maneuvers. When the council passes the first ordinance, it's too soon to tell what you're opposing; when it passes the second ordinance, it's too late, because the money's already been spent.
Another interesting aspect of the December 2007 transactions -- in which the $97.9 million was refinanced and the additional lending commitment made by B of A -- was the process by which a lender was selected. Johansen from the city explains it this way:
In October 2007, the City issued a Request for Proposals (RFP) to provide lines of credit for the City's urban renewal areas. The RFP was sent to nine financial institutions and the City received proposals from three firms: Bank of America, Wells Fargo and U.S. Bank. The proposals were reviewed by City staff and Bank of America was deemed to have the most cost-effective proposal.The RFP and responses (actually, the third was from KeyBank, not U.S. Bank) make for some wonkishly enlightening reading. At first, the city wanted the banks to agree to lend on a nonrevolving basis up to $277 million -- that is, the city would be allowed to borrow up to $277 million (including the refinanced $97.9 million) before it paid any of it back (except for interest). This would have allowed the balance to go as high as $277 million at any given time. Only B of A was willing to accommodate that request -- Wells Fargo and Key Bank said they could not go that high, and for them, the balance at any given time couldn't be higher than $175 million. At that point, the city gave B of A a chance to re-propose a deal based on the $175 million cap. It did so, and the city gave the deal to B of A.Since the lines of credit were placed directly with Bank of America and were not part of a public securities offering, there was no official statement or other disclosure document prepared for the transaction.
The interest rates offered by the three banks were:
| Bank | Rate |
| B of A (revised) | Prime minus 2.71% |
| KeyBank | Prime minus 2.63% |
| Wells Fargo | Prime minus 2.5% |
All three banks also offered the city an alternate interest rate option based on the well known LIBOR rate published by the British Bankers Association.
Anyway, given the chance to re-bid based on the $175 million balance ceiling, B of A offered the best deal, and the city bought it. However, it took quite a while for the deal to close. While the city's request for proposals called for a late October closing date, the deal dragged on until almost Christmas. There has been no official word on what caused the delay. Indeed, the $97.9 million of "interim" debt that the city had outstanding at that point was already owed to B of A, and so that institution should have been intimately familiar with the city's ways. What took two months to resolve in order to close the refinancing and new credit line is anyone's guess.
The contract by which the new line of credit was extended is surprisingly short -- almost casual for a deal of this size. And according to Johansen, the city did not disclose to the bank any financial information beyond its audited financial statements of June 30, 2006 and its current budget:
There were no other specific financial statements or other disclosure documents provided to Bank of America in connection with the lines of credit or related transactions. However, the City routinely provides the bank with copies or electronic links to Comprehensive Annual Financial Reports and Adopted Budgets for the City and the Portland Development Commission.Wow. You lend $277 million based on financial statements that are 18 months old, plus budgets? No wonder the bond market's in the tank.
In sum, our examination of the "interim" lines of credit for Portland urban renewal didn't make us any warmer or cozier with the path of fiscal deterioration on which the city is embarked. Like everything having to do with the urban renewal juggernaut, there's a strong fishy odor about the whole thing -- at best, some questionable policymaking.
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Comments (26)
Thanks for doing the research. There should be complete transparency around borrowing at city hall. You have demonstrated here that this is plainly not the case. You are probably the only one in town who is attempting to keep track of the bottom-line total debt burden. Apparently nobody at city hall is keeping track - or cares to. If we're lucky, one of the contenders for mayor or council elections will pick this up as a campaign issue. Maybe it will even get covered by the media then? Wishful thinking, perhaps.
Posted by Frank | February 1, 2008 3:02 AM
Charles Lewis is concerned about it. You can be sure dudes like Streetcar Smith and Gomer Middaugh will act like everything's peachy.
Posted by Jack Bog | February 1, 2008 3:29 AM
It seems like if City council had been good caretakers of the Public interest this "Surplus" could have better been used to pay off some of that short term debt.
"Wishing on a surplus, Portland City Council dreams big
City leaders have $90 million worth of ideas for a $35 million budget surplus
Wednesday, March 28, 2007"
http://www.portlandonline.com/shared/cfm/image.cfm?id=151729
Posted by swimmer | February 1, 2008 4:39 AM
Never having had a real private-sector job in any of their lives, they have a hard time understanding basic finance -- and they're easy prey for weasels like their good buddies, the developers.
Posted by Jack Bog | February 1, 2008 4:51 AM
Amanda Fritz is also taking about spending priorities on her blog. http://amandafritzforcitycouncil.com/node/98#comments
I think dealing with the cities lack of mental health and drug treatment facilities might have also been a better use of the $35 million surplus. Is there a listing anywhere of where the money was finally spent. I think I read we rented Carnegie Hall in New York for some performing group, that was one of Sam's cookies from the jar.
Posted by swimmer | February 1, 2008 5:02 AM
Money now in exchange for future tax revenues? Great, so now we are screwing our kids access to future taxes they have to pay.
Posted by Steve | February 1, 2008 6:22 AM
"It seems like if City council had been good caretakers of the Public interest this "Surplus" could have better been used to pay off some of that short term debt."
Or fix roads instead of raising water bills again?
Posted by Steve | February 1, 2008 6:24 AM
Assuming the method is OK:
Why not split the 277 million authorization among more than one supplier?
Take the lower interest deal for 175 million of credit line from the lowest bidder then rebid for the rest.
Would B of A (of BCCI fame) have offered a competitive interest rate bid on just 175 million? Or is the higher rate, for the balance of 102 million, based on the premise that it would be second in priority to the other when the CoP files bankruptcy? This justification for the higher rate, for the 102 million balance does not port to the first 175 million.
I guess that we will never know what B of A might have bid for the balance of 102 million had the CoP taken the 175 million bid from one of the more competitive offers. I suspect that the price would have been higher . . . but how much higher? Perhaps the other non B of A bidder might have again been more competitive, on the balance.
Last time I checked, money is a ubiquitous commodity that could not possibly provide an opportunity to invoke any consideration of selecting some brand name source. That is, the city's negotiator's skill level, at not playing hard ball, is as transparent as glass.
Posted by pdxnag | February 1, 2008 9:33 AM
Another key question is can this bunch at city hall get a return on their investments greater than the current fund cost of 3 and one-quarter percent. I'm not sure. Maybe if they buy enough flower pots and ski-lifts to panoramic viewing areas, they can get it back in tourist revenues. Maybe tourism can make a few bucks seeing how the U.S dollar is on sale. If we're heading toward more tourism, maybe Do Sho would make the best Mayor. It could be Sho time!
p.s I'm willing to vote Lewis but don't know much about him. Sho seems a lot more transparent than Adams, but the two share similar social agendas it seems.
Posted by Bob Clark | February 1, 2008 9:39 AM
oops -- my math problem today (prime minus X results in a better deal as X gets lower)
never mind
Posted by pdxnag | February 1, 2008 9:41 AM
Making this more troublesome is the total absence of any genuine oversight.
You know, the kind that actually looks at the money spent and critiques it's use.
No such management exists.
It's all make believe from the URACs to PDC comissioners to the City Council with the bureaucrats having no motivation to keep accurate records and officials having no motivation to look very close.
Intertwined throughout is the justification in pretending that "surely someone else has checked this".
No, they haven't. Yet when PDC staff recommends approval of various plans to the PDC commissioners and city council, the impressions of thoroughness, validity and merit could not be more contrived.
Absent and replaced with theroetical verbage and rhetoric is the documention and basis to support the various claims, estimates and revenue projections.
Since no one ever looks past the surface of the "reports", or God forbid audits anything, who cares?
Posted by Gene | February 1, 2008 9:45 AM
Giving this bunch a secret line of credit, is like giving Britney Spears the keys to a Rite Aid.
Posted by Bill McDonald | February 1, 2008 11:24 AM
And they wonder why there are concerns about the transportation tax?
Posted by jay | February 1, 2008 2:01 PM
The even larger question is how many other "deals" have these fiscally irrsponsible buffoons made in the past?
Posted by Dave A. | February 1, 2008 2:32 PM
Sam, the scam and Smell Bad Randy are " Fixing" the initiative on water bills by shenanigans learned in the legislature..
Better vote for Sho.
Transparency is a word for cover-up..Question does Portlander's deserve who they vote for?
Posted by KISS | February 1, 2008 2:33 PM
Hey, Kiss-
What you hear'n about moves by city hall to thwart the street fee initiative?
Posted by Bob Clark | February 1, 2008 4:32 PM
Jack, you're a wonk after my own heart. Excellent, excellent, excellent work.
Public oversight means public oversight. However, if you dumbdown the scholastic curriculum and TV-saturated numbskull brains, the resulting 'blind' public can't 'sight' nothing, over, under, or through.
The bookkeeping belongs in the public record, for urban development, public transportation, water and sewer utilities, also electric and (natural) gas utilities, also telephone and public airwaves (broadcasting) utilities -- all these monopoly 'captive' markets of a city's residents should have stayed 'socialized' as near as they once were in the fiscal domain of Municipal Bonds. (Before the militarized Secret Deal industry capitalistas wreaked havoc in federal extortions on cities and states, from the post-War '50s on through Reagan.) So much must be rolled back.
But there's no one still around who remembers how democratic public oversight works. Hint: Hard work. Educated brains, (or, 'eggheads,' as the anti-democracy rightists used to slur Adlai Stevenson's quality of civics), matter.
And it is for this now-systemic corruption instituted by the rightwing capitalists of fascism, (def'n: the combine in one of the separate interests and purposes of government and business), starting the decay of America's democratic greatness fifty or sixty years ago -- 'privatizing' public utilities!, for gawdsake: stupidity! idiocy! selling out our soul and national heritage -- wherein I cut a lot of slack, almost forgiveness, for today's administrators. Not that there's no touch of larceny in their hearts, any less than ever; but that no one can conduct themselves justly in an illicit government's ways as we are gotten in today.
My 'proof' it is the system, not the particular persons, is that changing the persons improves quality of life not a whit. When we restore the system as it was in the times of public oversight glory, re-establishing in common understanding that rightwing extremism such as by Joe McCarthy or LIARS Larson is not only scurrilous and antisocial but indictable and prosecutable, then we shall re-acquaint the qualities in civic life of security and integrity, provision and probity.
Then, too, under re-instated public oversight, changing persons in administration does not deteriorate municipal beneficence, since flaming rightwingers are eliminated, in view or in disguise, as mistakes that could fool us twice to employ in public service.
You are a gem, Jack, and your investigative citizen oversight a civic model for all.
Posted by Tenskwatawa | February 1, 2008 4:57 PM
Jack: Among the many excellent points you raise here is the seeming reluctance of the city to go ahead and issue conventional long-term bonds.
Your point about the potential for voter rebellion on the bond issuance is a good one. I'm no municipal finance authority, but I would also suspect the city is stalling that off because its bond rating would surely sink.
Posted by Roger | February 1, 2008 6:35 PM
Jack, am I being censored?
Posted by KISS | February 1, 2008 7:07 PM
Excellent reporting Jack.
Posted by HLMA267 | February 1, 2008 7:08 PM
Tens,
What the heck was that?
The lack of oversight for Portland's schemes is the fault of the right wing and Lars?
Good grief man, I listen to Lars and he's all for audits, oversight and better controls across the board.
There's not a single ring wing connection to any of the problems in Portland management.
Any and all things scurrilous, antisocial, indictable and prosecutable in city agencies and governance involves no "rightwing extremism", no Lars and no Republicans.
As you've demonstrated yourself there's more than enough fodder available for leties to bash the right wing, Lars, Gordon Smith and all things Republican.
None of it can be found in the CoP.
Your own family has issues. Stop blaming the neighbors.
Posted by Gene | February 1, 2008 8:56 PM
Good job, Jack! Keep letting that sunshine in where they don't want it!
Posted by dyspeptic | February 1, 2008 11:06 PM
Portland's true bond rating is an interesting question. Quite frequently in recent years, the city's long-term bonds have been insured by MBIA, which guaranteed the bonds a top rating and obscured the city's true credit status. Now that MBIA is itself in troubled waters, that game may be stopping.
Posted by Jack Bog | February 1, 2008 11:35 PM
Yeah man, like it's all Lars Larson's fault, dude!
Isn't it?
Yeah.........well - okay then.
Lars who?
Posted by Jon Renner | February 2, 2008 12:52 AM
"Wow. You lend $277 million based on financial statements that are 18 months old, plus budgets? No wonder the bond market's in the tank"
If the city has issued other bonds recently then the bank would have had the official statement from that deal; although it does seem strange the bank would not have required a supplement from the city to such its most recent OS. Also, note that pursuant to section 14.3(b) of the contract the bank can terminate the line if, in its sole discretion, it determines that the city has suffered a material adverse event. Would election of Sam Adams as mayor qualify?
Posted by Kurt Runzler | February 3, 2008 7:50 PM
If the city has issued other bonds recently then the bank would have had the official statement from that deal
The most recent official statement was October 2.
I am sure the city finance people quietly run financial statements of some sort on a quarterly or monthly basis. If they didn't, they should all be fired. But they act as though such reports don't exist; they certainly don't show them to the public.
Posted by Jack Bog | February 3, 2008 8:56 PM