Borrowing money that's already down the rat hole
It's another big day in the history of Portland's reckless borrowing spree of the new millennium. Today the city is scheduled to sell the permanent bonds to finance around $64 million that's already been spent in the economically failed South Waterfront District, known by some of us as SoWhat for short.
A quick read of the sales pitch for the bonds -- which are being sold in a private negotiation with Bank of America and Citi -- reveals a sobering picture. It's a pretty bleak scene down in SoWhat, and these bonds aren't exactly top-tier. In fact, they're rated A1 by Moody's, and that's only the fifth-highest bond rating that organization issues. It's interesting that the mayor and his minions like to brag about the city's AAA bond rating. But that rating applies only to the city's general obligation bonds, of which there are only around $61 million outstanding. In contrast, today's borrowing will be $64 million for SoWhat alone, and not general obligations, of course. The city's overall total long-term debt load is about $3 billion, most of it not AAA, by a longshot. Add another $3 billion for unfunded pensions, and it's downright scary.
Anyway, today's sales document, known as the "official statement," reveals that the city is running one of its favorite trick plays to perfection on this deal. It's signing up for the long-term mortgage on its SoWhat infrastructure now, but the $64 million was spent long ago -- borrowed (probably from Bank of America) on "interim" lines of credit. At the time those interim loans were authorized by the City Council, it was too early to tell exactly what would happen in SoWhat. Now, when the interim loans have to be paid off to avoid default, it's too late not to issue the permanent bonds. And so the city's voters never really got a chance to challenge the spending. Classic Portland shenanigans, aided and abetted by the state legislature, which lets the city get away with it. The area's near-monopoly government bond lawyer, Harvey Rogers, probably drafts bills authorizing all kinds of ill-advised borrowing by the city, and when the city's lobbyists take them down to Salem, the lawmakers, many of whom can't balance their own checkbook, rubber-stamp them.
But we digress. At one point the document indicates that about $30 million of today's debt will be for 12 years, and the other $34 million or so will be for 20 years. That could change before the sale is finalized, but it's clear that the junk that's been built in SoWhat so far, won't be paid off for a long time.
There's an interesting appendix attached to the sales pitch. It's a study by the consulting company ECONorthwest -- a firm that tends to turn a nice buck issuing reports that support "urban renewal" and other City Hall pipedreams. In the report, the consultants project that condo prices will continue to drop pretty steeply, with a 38% crater over just two years. And to us, the money quote from the report comes when it states quite clearly that it isn't just the national economy that is causing the crash. Portland, they say, clearly overbuilt condos -- more than could be profitably sold even in good times:
The primary issue for the high-rise condominium market is one of oversupply. Simply put, too many high-priced condominium units were constructed between 2005 and 2008 than were warranted by the depth of the real demand for the product, irrespective of macro-economic conditions.Bingo. And they left out the fact that they're butt-ugly insults to our neighborhoods, too.
Another fascinating fact that we haven't seen mentioned elsewhere is that Comcast has a major property tax dispute going in Portland right now, including a huge battle over property valuation in SoWhat. The city's chart of big property owners in the district shows Comcast holding $74.8 million of assessed value, but down in a footnote to the chart, one reads that Comcast is alleging that the proper assessed value should be only around $13.2 million. That's a $61.6 million difference of opinion.
Anyway, I propose a toast to City of Portland municipal bonds and all the shiny toys they buy. Let's worry some other day about paying them off.
| Posted at 8:40 AM | Permalink |
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Comments (18)
It's actually a violation of SEC anti-fraud regulations for municipalities to not reveal all "material facts," including negative information, about projects being funded by bonds. So, what is the responsibility of Oregon Attorney General John Kroger and the Oregon State Treasury when it comes to reporting and/or enforcing these violations?
The renovation of PGE Park is an obvious case of fraud using the same "line of credit" tactic described in this posting. The evidence couldn't be more clear, and the arithmetic couldn't be simpler.
Posted by Peter Apanel | September 15, 2010 9:09 AM
"It's a pretty bleak scene down in SoWhat, and these bonds aren't exactly top-tier. In fact, they're rated A1 by Moody's"
Can't wait to find out the interest rate, and how much it will amount to over the life of the bonds.
Portland is like the person rolling $30k from the mastercard to the visa, thinking that this constitutes "financial planning."
Posted by Snards | September 15, 2010 10:00 AM
I meant to mention that you do a real service for this city Jack with your research. I hope plenty of people on the "inside" read these posts, even if they won't admit it.
Posted by Snards | September 15, 2010 10:05 AM
Jack, along with Comcast's valuation challenge from $75M to $13M, Faye Brown with PDC's financial gurus reported at the last URAC meeting that over 200 condo owners in SoWhat are also appealing their property tax valuations. She admitted that the challenges will likely succeed because of recent sales and auction sales. It isn't looking pretty in SoWhat.
Another interesting aspect is that PDC Financial just three months ago was projecting SoWhat's "Total Resources"(dollars available as TIF dollars per year) from 09-10 to 2015 to average in the low teens, +-$12 Million per year. Now they admit that is too high, but wouldn't give a percentage of how much lower it will go. With over $200 Million left in public projects required to be completed in SoWhat there is certainly a financial problem. Many projects are on hold.
In regards to the Jack's note on present debt in SoWhat alone, a recent PDC breakdown lists:
Central District Line of Credit (Center of SoWhat) $44.4M
North Macadam Line of Credit $18.5M
Streetcar Extension Line of Credit $3M
Total- $65.9 Million
It isn't nice to know that we-taxpayers have been fronting Oregon's largest urban renewal area with fronted, line of credit dollars. It's worse than borrowing from your grandma. We don't even have enough TIF dollars coming in to pay the debt nor the projects. SoWhat is broke.
Also, PDC staff in the last meeting prided itself on offering for sale A-1 bonds. Chairman of the PDC Board applauded that it will be cheap borrowed money. Interesting spin.
Posted by Lee | September 15, 2010 10:30 AM
Didn't we just get thru with places like Moody's over-rating mortgage-backed securities. So now they are pimpin' for municipal securities.
I think the game plan is run them for a couple of years and then issue some more debt to pay them off then. Of course, we're digging an ever deeper hole, but heck CoP can find some new way to generate revenue (like $100/gal water) or maybe 100-year TIF districts.
Posted by Steve | September 15, 2010 10:33 AM
What does it take to get something like this sent to the voters? Is it just impossible? It would be great to get the bond issuance canceled and have SoWhat default on the $65M LOC to BofA PDQ.
Posted by Don Smith | September 15, 2010 11:19 AM
Peter Apanel -
Neither the State AG nor the State Treasurer have any direct enforcement authority regarding state securities law, civil or criminal.
That responsibility is vested in the Department of Insurance and Finance, and specifically the Finance and Corporate Securities Division headed by Kevin Anselm within that Department.
When DIF goes to court, the AG's office provides the lawyers who represent DIF, but the decision to sue civilly rests with the DIF Director. The DIF Director makes all decisions of who to sue and how to proceed or settle. As a practical matter, the DIF Director delegates that responsibility to the Director of the Division of Finance and Corporate Securities.
Any decision to proceed criminally under state law rests with the DA in the county where the violation took place -- probably Multnomah, in the example you posit. Realistically, few if any DA in Oregon in any county will do a criminal case for violation of state securities law. Even if handed the case wrapped up in ribbons and bows.
Posted by Nonny Mouse | September 15, 2010 12:17 PM
So Urban Renewal scheme robs money from basic services - such as the DA's Office, thereby leaving that office without the necessary resources to pursue securities fraud cases against the crooks who are spending the UR money. Ironic, no?
Posted by Frank | September 15, 2010 12:30 PM
Well, I am 3k miles away from Portland and know nothing of the project, but I am intrigued by Jack's post where he talks about this is a "negotiated" transaction.
Money is a commodity. Why would this debt not be put out to competitive bid. I don't know the answer but I suggest you look at the fees and you might well see something interesting. Oh, and if you can, see if you can determine how much CITI and BOA contribute directly or indirectly to your local politicians.
Ironic, those who seem to state the strongest belief in competitive markets free of regulation don't ever want to participate in them.
Posted by Sid | September 15, 2010 12:37 PM
Now that around 51% of Americans are dependent on government assistance, the country has essentially "jumped the shark".
Plus, the labor department is meeting this week to plan how to force you to convert your IRA or 401K into a government "managed" account:
http://www.financialsense.com/contributors/d-sherman-okst/the-6-trillion-401k-grab
For these and other dire reasons, the local Construction Mafia will have to come up with a new scheme to rob us.
Posted by Ralph Woods | September 15, 2010 12:41 PM
"Why would this debt not be put out to competitive bid."
You're missing the point. Interest rates are cheap for everyone, so CoP is taking on debt just to be taking on debt whether it means the project makes sense to spend it on or to pay it back with.
Posted by Steve | September 15, 2010 12:50 PM
Sid asks: Why would this debt not be put out to competitive bid.
Because this is a pretty funky offering. You'll only get competitive bidding on "plain vanilla" general obligation deals. Why? Imagine being an underwriter thinking of bidding on this. You spend about tens of thousands of dollars just to prepare and submit a bid, only to lose to the guy who comes in a tenth of a basis point lower. Next time around you say, "Screw this!" And *poof* competitive bidding suddenly becomes sole sourcing.
Posted by Garage Wine | September 15, 2010 1:35 PM
I wonder what it would take to the the yokel DOJ lazy slugs to take a look at prosecuting this? Besides securities fraud, I see RICO, and I see the vaunted theft of honest services by the elected officials and bureaucrats involved in this nonsense? Anyone here know any of those pikers?
Posted by LucsAdvo | September 15, 2010 3:14 PM
And I meant the Feds by DOJ. We know the state AG is toothless.
Posted by LucsAdvo | September 15, 2010 3:15 PM
LucsAdvo,
It would have to be the Feds.
Where are they? It looks like we the citizens are having to do the watch dogging and we sure could use some Fed eyes on this. It is just getting more and more critical around here. We do not seem to have whistle blowers, investigative reporters, and leaders who are in a position to put or to want to put a stop on the wrongdoings around here.
http://www.reuters.com/article/idUSTRE4B045V20081201
(Reuters) - Federal authorities arrested the mayor of Birmingham, Alabama, on Monday in a corruption probe surrounding a sewer bond debt that could lead to the largest municipal bankruptcy in U.S. history.
Posted by clinamen | September 15, 2010 5:27 PM
clinamen - I have heard from a long time local attorney who handles both civil and criminal work that the local Federal prosecutors are not worth too much.... I could go on a rant but I will refrain.... Jack gets upset when I rip lawyers too harshly
Posted by LucsAdvo | September 15, 2010 6:24 PM
"A quick read of the sales pitch for the bonds -- which are being sold in a private negotiation with Bank of America and Citi "
Now I get the question. Citi and BoA are the lead offering agents for the muni bonds. They get a percentage like any other bank that would be offering these. However, since guys like Citi have a large in-house demand, it may be easier to place these. I'd guess if the sell the bonds for 103 (e.g) they'd give CoP 102 or whatever the % is.
That's what I find hard to believe is that there is still a lot of demand for these, however, if they yield 4-5% tax-free that's still better than
Posted by Steve | September 15, 2010 10:08 PM
Portland is not alone in borrowing money that's already down the rat hole.
Seattle still owes $82 million on the Kingdome...A structure that doesn't even exist anymore. See: http://www.nwcn.com/news/Seattle-King-County-Kingdome-102679614.html
Posted by Britt Storkson | September 16, 2010 5:26 AM