Two months ago, without any mention in the media at all, Harris County bailed the City of Houston out of a bad deal by loaning it $118 million. As reported on the Chronicle’s website on Sunday,
A series of unexpected market swings and a relationship with a troubled bank has left the city of Houston paying more than $600,000 a month in interest — far higher than the market rate for comparable securities — to a very unusual investor: Harris County.
The county came to Houston’s rescue in December after a bank that backed $182 million in city bonds had its credit downgraded, leaving the city with a 15 percent interest rate.
The timeline of events may be found here. One might note there’s over $60 million difference in the two figures. Metro is apparently part of the difference, in an even more unusual transaction (emphasis added):
More and more, governments that depend on financing for everything from new sewer plants to overpasses are seeing the costs of debt soar, as the many parties involved in their complex municipal finance deals are seized by fear or faltering markets.
As a solution, they have begun to turn to investors that seem a little more stable and familiar: themselves. In October, when interest rates for short-term municipal investments shot up to the 8 percent to 10 percent range, the city of Houston and the Metropolitan Transit Authority of Harris County agreed to invest $30 million in each other.
Moncur said the city, in addition to buying bonds from as far away as Broward County, Fla., also has begun investing millions of dollars in its own commercial paper.
Excuse me, but “commercial paper” means short-term loans. How does the city loan itself money? Remember a few months ago when the city refinanced its pension obligation, and those numbers didn’t seem to add up either? Lo and behold, this was at the same time the city was being bailed out by the county.
Then there’s the point that the city is not alone: “many parties involved in their complex municipal finance deals are seized by fear or faltering markets”. The combination of these two statements seems to suggest that local governments across the nation are borrowing money from each other in order to, as they are sure to phrase it: “share the risk.” A more appropriate phrase might be “chain-reaction disaster,” as a financial collapse by any one of them touches off payment problems for all the rest down the line. We just saw how well banks, the real estate market, financial investment houses, the stock market, and government guarantors worked together to ensure a broad financial collapse. Are our cities, counties, and transit agencies all trying to replicate the same disaster?
Then there’s the minor issue of the sheep being fleeced to finance this house of cards: taxpayers from other cities and the county. How do these areas feel about being put on the hook for the City of Houston’s increasingly convoluted bookkeeping practices? And one more question — does anyone remember something that was supposed to be around for times like these? I believe it was called “the rainy day fund.” Whatever happened to that?
More and more, it’s beginning to look as though the City of Houston is using accounting tricks to remain solvent and fund Mayor White’s priorities. Given that the City Controller is thought to be the front-runner in the 2009 race, her cooperation in these questionable tail-chasing schemes and poor selection of investment banks could make 2009 a very interesting campaign year.
KEVIN WHITED ADDS: I can’t say how many times that I’ve heard Mayor White tell people he brings a businesslike approach to city government, or how many times I’ve heard that he’d eventually like to take his business and financial acumen to a statewide political office. So I guess I am left wondering how our hands-on mayor doesn’t feature at all in this story of debt financing going awry on his watch — or, as Ubu Roi alludes, why City Controller and mayoral wannabe Annise Parker also don’t feature at all in this story. Shouldn’t they have some comment on it?
Unfortunately, there is also no quote from Houston’s expert-on-everything Bob Stein to tell me what I am supposed to think about this series of events, so we’ll throw it out to commenters: What do you think about the story?
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