MOORLACH UPDATE — Riverside Press-Enterprise — August 2, 2011

On occasion, a voice from the past will give me a call.  Alicia Robinson worked for the Daily Pilot for many years before taking a new assignment with The Press-Enterprise.  She enjoyed the fun task of analyzing a Comprehensive Annual Financial Report (CAFR) for the city of Riverside.  This city generates nearly two-thirds of its revenues from ratepayers for water and electricity.  That makes it difficult to compare to other cities, as most cities do not own utilities.  The good news is that a reporter has taken the time to do some analysis below the surface of a municipality’s financials, and that is a trend that should become more prevalent in the coming years.

RIVERSIDE: Officials not worried about highest-ever debt

By ALICIA ROBINSON
The Press-Enterprise

Riverside’s current debt load — $1.7 billion — is the highest in city history, partly due to the slew of public works projects over the past five years known as the Renaissance.

At a time when federal officials are scrambling to slash spending and avoid defaulting on the nation’s debts, the city’s borrowing might sound like a cause for panic.

But Riverside — Riverside County’s largest city, with a total budget of just under $993 million — isn’t the only town in this position. And city officials and finance experts say the debt isn’t a concern as long as there are dependable revenues to pay it off.

Riverside’s borrowing fits with a general trend of municipal debt that was on the rise for the past decade as cities expanded, built new roads, parks and sewer lines and had a larger property-tax base to help repay debts, said Matthew Reining, a Standard & Poor’s credit analyst in San Francisco.

It made sense to borrow because interest rates were low and city revenues were rising as the economy improved, said Gavin Murphy, editor in chief at the Bond Buyer, a trade publication focusing on municipal bonds.

"When (the economy) reversed itself in 2008, they’re now having to look at servicing what they’ve already issued, given lower revenues, and now politically it’s become less popular to suggest paying for things through borrowing," Murphy said.

Borrowing trend

Riverside is not alone in carrying a high debt load and recently borrowing money. For example, Pasadena’s debt is also at a historic high, and the city recently borrowed about $156 million to pay for upgrades at the Rose Bowl, Finance Director Andy Green said.

Pasadena will repay the debt with money from additional luxury seating, increased parking fees and some private sources, so it won’t affect the city’s general fund, which pays for day-to-day services such as police and street sweeping.

"That has been the philosophy for Pasadena, minimizing the general fund impact," Green said.

In Riverside, aside from a slight dip in fiscal 2008-09, the city’s debt has grown steadily for the past eight years and it has nearly tripled since fiscal 2002-03, when it was just under $556 million.

Most of the growth has been since 2005-06, when the Renaissance public works initiative launched. It condensed 30 years of upgrades to water and sewer systems, roads, parks and other facilities into five years and has been projected to cost $1.57 billion.

To pay for the projects, the city issued big chunks of bonds and incurred other municipal debt in 2006, 2007 and late 2009.

Riverside Finance Director Brent Mason noted that most of the recent debt is for water, sewer and electricity projects, which have their own special funds fed by customer revenue. Officials already have adjusted utility rates to cover current debt loads, so no rate hikes are planned in the near term, he said.

The state constitution includes a limit on how much general obligation debt cities can take on — that’s debt repaid from voter-approved special taxes. The state limit is a percentage of the city’s total assessed value, and since most of Riverside’s debt is not general obligation, "We’re way, way, way, tens of millions beneath the limit," Mason said.

As of 2010, the city had borrowed just $17 million of its $631 million general obligation debt capacity, Mason said.

For other kinds of debt, what the city can borrow is largely based on how much the market — including banks and bond buyers — believes the city can repay, just like an individual taking out a loan for a house or car.

If a city is overburdened with debt, bond rating agencies would give it a low rating, resulting in higher interest rates or more difficulty selling bonds, said Orange County Supervisor John Moorlach, who was treasurer in that county for more than a decade and blew the whistle on its massive 1994 bankruptcy.

As Mason explained it, "If you’ve issued the maximum amount of debt that your revenues will support, the world won’t let you issue any more debt."

Comparing the debt

Finance experts have various ways of assessing how leveraged a city is, Mason said. There’s debt per capita, which divides up the amount of debt by the number of city residents to come up with a dollars-per-person figure. And based on 2010 numbers, Riverside owed about $5,594 for every one of its 304,051 residents.

But per capita debt can be misleading because not every dollar of debt is paid for by the entire tax base. For example, a special district set up to install streetlights would only tax property owners in the area where the lights are put in. Everyone in the city wouldn’t pay for the lights.

Compared with Anaheim and Pasadena — cities Mason described as comparable to Riverside — and several Inland cities of varying sizes, Riverside’s per capita debt is on the high side. But Mason and other finance experts said it’s hard to make a fair comparison because each city provides different services and has different revenues and borrowing needs.

Riverside, Pasadena and Anaheim each have their own public utilities, which carry large costs but also provide money from water, sewer and electricity customers.

Riverside also has used redevelopment bonds extensively for recent projects.

A COMPLEX ISSUE

Riverside Mayor Ron Loveridge said being at the city’s highest-ever debt level should be weighed against having its highest population ever and the fact it has completed sorely needed projects.

He hasn’t heard any concerns from residents about the debt load, he said.

"I don’t think most people have an understanding of what debt represents. It’s complex," Loveridge said. "They want the city to be a good steward of its revenues and deliver good services."

He and Mason said they expect to see the city’s debt levels decline in coming years, other than a few chunks of borrowing that already have been planned.

That’s because federal and state funds have been cut drastically, the economic climate hasn’t picked up much and the city has committed to pay the state to continue redevelopment — and that money has to come from somewhere.

All those things together mean Riverside’s boom times of building and borrowing are over for now.

"We’re managing rather than building in the next several years," Loveridge said.

Reach Alicia Robinson at 951-368-9461 or arobinson@PE.com

FIVE-YEAR LOOK BACKS

August 2

2001

The impacts of the County’s bankruptcy filing would be felt for years by those who played a part.  John Howard of the OC Register provides an example in “Bond adviser was cited by SEC – Energy:  Douglas S. Montague, hired to aid state offering, had a role in similar plan for O.C. before its 1994 bankruptcy.”  Here are the first few paragraphs to set up the situation, along with a comment from my office when asked about the matter.  Needless to say, Mr. Montague was not amused with the article.  He had come up before in an article concerning the Orange County Transportation Corridor Agencies.  Being haunted by the County’s bankruptcy was disconcerting to him for many years.

                A key advisor hired to help California launch the largest municipal-bond offering ever was cited on allegations of misleading bond investors before Orange County’s $1.6 billion bankruptcy in 1994 and paid part of an $870,000 civil penalty.

Douglas S. Montague was one of two investment bankers cited by the U.S. Securities and Exchange Commission in its action against Credit Suisse First Boston Corp. after the bankruptcy.  The SEC said the two bankers withheld crucial information that would have helped investors realize the shaky condition of the county’s treasury before they bought $110 million in county-backed bonds.

The advisers did not acknowledge liability, but after lengthy negotiations with the regulatory agency, Montague and the other investment banker paid $35,000 each in penalties while the firm paid $800,000.

The action marked the first time the SEC had cited a municipal-bond underwriter over allegations of misleading investors.  The SEC handles about 500 sanctions annually, but only a small amount involve municipal-bond underwriting, said SEC spokesman John Heine.

Gov. Gray Davis’ administration said this week that it was aware of Montague’s role in the 1994 bankruptcy but that it did not consider it a significant factor when the administration decided in January to approve a $1.8 million financial-services contract with Montague’s new company, Montague, DeRose and Associates of Woodland Hills.

There are similarities between Orange County in 1994 and the state now, said Brett Barbre, spokesman for Orange County Treasurer John Moorlach.  Moorlach, an accountant, was among the first to raise the alarm in 1994 about the county’s looming bankruptcy.

“It’s eerie, the similarities between what Bob Citron was doing in 1994 and what Gray Davis and his advisers appear to be doing in 2001,” Barbre said.  “Then, the unexpected occurred when rates kept going up and Citron was betting they would go down.  Now, Davis has been saying things will take care of itself, and that was followed by PG&E’s bankruptcy, and the state has still failed to address the problems legislatively.”

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