Is Portland violating its bond covenants?
The current lawsuit against the City of Portland for illegal spending of water and sewer revenues is turning up some fascinating documents. Here's a good one -- a memo written by the city attorney's office in June 2010 in response to an inquiry by the city auditor. The topic: What are the rules of the road for the city in spending water and sewer funds?
As one might expect, there are several sets of legal restrictions on the expenditure of these revenue streams. There is state law, and there is the city charter. But not to be overlooked are the city's bond covenants -- the promises it makes to lenders when it goes out and borrows nine or even 10 figures on sewer and water projects. All of the rules are important, but the bond covenants are particularly significant, because if Wall Street detects something amiss with the city's use of the revenues that are supposed to pay the bonds back, the city's ability to raise cheap money through borrowing could dry up faster than you can say "Rose Festival headquarters."
We'll let the city attorney's memo, written by a couple of in-house City Hall lawyers, do the talking. On sewer:
The Charter authorizes sewer user fees "for purposes relating to design, construction, acquisition, operation, maintenance and contract requirements of sewage treatment or purification facilities and related facilities." This limited authorization to raise money is match by a limited authorization to spend money "for any matter connected with the sewer or sewage disposal or treatment system of the City, and bonded debt and debt service related thereto." Taken together, these provisions authorize collection and expendÃture of money for purposes directly related to operation of the sewer utility....Additional authority to impose charges for sewer service (including stormwater drainage) is found in ORS [Oregon Revised Statutes] 454.225. This statute contains a requirement that sewer charges imposed under the statute's authority be "just and equitable."...
[A]s a practical matter [state law] results in a mandate that sewer charges imposed throughout Portland be based upon reasonable cost-of-service sewer utility ratemaking principles. For our purposes, those principles require that customers only pay rates that can be tied to some sewer "service" actually provided in return....
And as we've mentioned on this blog more than once, if sewer charges are unrelated to actual provision of service, they could also be reclassified as a "tax," which could cause all sorts of legal trouble for the city.
On water:
[T]he City Attorney's Office has for decades interpreted the [City Charter] to constrain indirect transfers of Water Bureau monies to serve non-water purposes. According to an oft-cited opinion, the Charter limitation is intended to "prevent the City Council from using the City's water revenues to carry out General Fund projects."... Water Bureau money cannot be spent on matters "unrelated" to the Water System.... "Expenditures that are 'related' to the water works and system are expenditures: (1) whose primary purpose is to promote the objectives of the water... services of the City, and (2) are reasonably calculated to promote those objectives."...Since Water Bureau expenses can only be incurred if they "relate" to the water works, the limit on expenditures also effectively constrains Council discretion to raise rates for purposes unrelated to the water system....
And that brings the memo around to the bond covenants:
Bond covenants also impose constraints on the City's management of the sewer utility, including some general guidance on imposition of charges.... The bond covenant provides:... "The City shall cause the System to be operated at all times in a safe, sound, efficient and economic manner in compliance with all health, safety and environmental laws, regulatory body rules, regulatory body orders and court order applicable to the City's operation and ownership of the system...." The bond covenant could, for example, lead to questions whether particular expenditures would be viewed by bondholders as "sound, efficient and economic" costs for a municipal sewer utility to incur....Finally, in selling Water Bureau revenue bonds, the City typically makes certain representations and contractual commitments to the bond purchasers. For instance, the disclosure statement for water bonds to be sold this spring declares that proceeds will be used to "fund various capital improvements to the Water System...." Our bond counsel advises us that this announcement represents the City's commitment to use the proceeds only for projects "related to" the water system. The relationship must be "clear and direct." A less conservative interpretation could adversely affect the credit rating of Water Bureau revenue bonds. In addition, the City covenants in selling bonds that it "will operate the Water System in a sound, efficient, and economic manner...." One way to meet that covenant is to insure that water funds are spent only for water related purposes.
Is the city in breach of its bond covenants? Now, that would be a financial fiasco of a magnitude that we never dreamed even the Sam Rand Twins could bring about. But the matter's in court, and if the disgruntled water ratepayers win their case, unhappy bondholders may not be far behind.
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Comments (15)
Given what the mayor was able to get away with regarding his "intern", CoP seems capable of getting away with just about anything it pleases and so far, confidently behaves like it knows it.
Posted by Mr. Grumpy | March 7, 2012 9:02 AM
The sleeper phrase in all that is reasonably calculated as in " (2) are reasonably calculated to promote those objectives."...
Reasonable calculated means you can't just wave your hands and say that, say, providing a nice place to barbecue in the hills is providing a benefit. Calculations require inputs. They can be estimates, but they can't be totally pulled out of the ear of the agency. Moreover, the real power in the phrase is that it uses the past tense ... The expenditures have to be reasonably _calculated_, as in (1) you must actually do the work to calculate and (2) you have to do it BEFORE you spend the coin.
When the standard is "reasonably calculable" then that word is used; that means you just have to have been able to make the calculation.
Go get 'em!
Posted by George Anonymuncule Seldes | March 7, 2012 9:04 AM
Another sleeper phrase is, "One way to meet that covenant is to insure that water funds are spent only for water related purposes".
I think most would interpret "water funds" as being more than the funds appropriated by a bond sale. It is talking about all the water funds. So Sam/Rands proclivity to "mix" funds, but then segregate funds saying, "Oh, we aren't using those particular funds in same bureau funds, we can do that" is illegal.
The legal findings of all this will have far-reaching consequences because it is practiced throughout the city and it's PDC.
Posted by Lee | March 7, 2012 9:40 AM
What? The banks have the last word and can come in the start taking our assets?
Gee, I wonder if that has been the plan all along?
Or else, incompetence mixed with hubris leads to the same result.
Thank you, noble leaders for your wise stewardship of our little valley village.
Posted by Tim | March 7, 2012 9:41 AM
Exactly, Tim.
Jack writes:
"...if Wall Street detects something amiss with the city's use of the revenues that are supposed to pay the bonds back, the city's ability to raise cheap money through borrowing could dry up faster than you can say "Rose Festival headquarters.""
That's not the Wall Street I've been following. Wall Street sees reckless spending by local politicians as an opportunity. Wall Street's pattern would be to encourage the dubious borrowing, then place side bets against the bonds and finally, swoop in and seize assets when the bonds can no longer be paid back. If anything, Wall Street would offer slick ways to hide the local debt from the public until it was too late. (See Greece.)
Not lending us more money for ridiclulous projects would be looking out for us, for our financial stability. Do you really think Wall Street cares if we get in trouble? When did that start?
There's a tendency here to assign the big chiefs at the top with the good intentions of a higher morality. Neither Wall Street - or for that matter the NCAA - deserve it. Think of Wall Street as a bunch of Sam Adams types with better brains and better suits.
Posted by Bill McDonald | March 7, 2012 9:46 AM
I don't like how city money is going to be spent on fighting this lawsuit (which, of course, was entirely avoidable), because now there's even less money for fixing potholes. But if dragging the city into court and/or provoking financiers to flee the city's bonds is the only way to slap the city's leaders out of their smug disregard for the law and beleaguered ratepayers, then so be it.
Posted by Eric | March 7, 2012 9:59 AM
Bottom line,
Can Sam and Randy be held financially responsible;e for their malfeasance ?
Posted by tankfixer | March 7, 2012 10:37 AM
Bottom line, tankfixer, is that the taxpayers of Portland pay for the incompetence and venality of their elected and appointed officials.
Does OR have a process and precedent for the state government assuming control of the finances of a county or municipality?
Posted by Gardiner Menefree | March 7, 2012 10:56 AM
You missed the best line in the attorney letter:
"The fee should not materially exceed the cost of providing the service."
Let's see, 4 years ago PWB was collecting $80M for water. Water use has dropped and they're collecting $120M in 2011.
Coincidence? I think not.
This is going to be great seeing the gymnastics Randy goes thru to connect some project like the Rose Festival HQ with water delivery.
Better yet, I'd love to see a list of all the transfers of money out of PWB to anything.
Posted by Steve | March 7, 2012 11:15 AM
Weep, weep for what can happen to our city, debt swamping has been rampant by our council, and especially Leonard and PWB, no conscience, inept or corrupt.
The rest on council cannot be excused for they go along.
Pay close attention to new ones wanting to come into our city chambers,
those supported by insiders to continue the agenda doesn't bode well....
there will be more weeping in our city.
Posted by clinamen | March 7, 2012 11:27 AM
It's classic that something that falls from the sky has been turned into such an expensive burden. Remember when George Harrison was saying if you take a walk, they'll tax your feet? Then he got off the money line: "Don't ask me what I want it for if you don't want to pay some more."
Charging for water in the Pacific Northwest is like charging for sand in Arabia.
Posted by Bill McDonald | March 7, 2012 11:30 AM
Best line I've seen in a long time, Bill!
Posted by Mr. Grumpy | March 7, 2012 11:43 AM
"The fee should not materially exceed the cost of providing the service."
JK: What service do I receive in exchange for paying for street run off?
Or for roof area when NONE of the water leaves my premises?
Posted by jim karlock | March 7, 2012 1:15 PM
Excellent point Jim K,
like many in PDX our downspouts were disconnected years ago.
In addition since our drive slopes away from the street any runoff from it also drains back into the yard.
Any runoff from the driveway approach is inconsequential.
Therefore for the city to charge a storm water runoff fee could be considered fraud on the cities part.
Posted by tankfixer | March 7, 2012 8:10 PM
Re: "...for the city to charge a storm water runoff fee could be considered fraud on the cities part."
tankfixer,
For the city to charge a homeowner a fee for runoff decades after the city approved the plan for siting a house dependent upon downspout control of runoff -- in an era predating runoff control -- could also be considered at very least unfair. Especially if slopes and setbacks previously approved by the city preclude downspout disconnection.
But who's going to consider ex post appropriation unfair? A judge? Our new director of Equity, currently on his 30-day walkabout?
This city's elected and appointed officials view this city's residents as sources of revenue, not as citizens sharing a common purpose.
And, as long as the outdated, inefficient, expensive commission form of governance is in place, there is no chance this will change. Those who benefit from its shortcomings have no reason to change it. The risible excuses for elections from among flawed candidates with no intention or even need to reveal their purposes are certainly not going to bring about change.
Posted by Gardiner Menefree | March 8, 2012 10:21 AM