Muni Finance Fail: Miami, FL and Portland, OR

WSJ: Delaying road maintenance:

In Miami, the Securities and Exchange Commission is wrapping up an investigation into whether the city used funds intended for roads and other purposes to fill budget gaps elsewhere, according to people close to the probe. Bondholders are suing, saying the moves obscured the city’s true finances. The city’s former budget director is also suing, claiming he was fired for cooperating with the SEC and the Federal Bureau of Investigation.

Improper usage of funds?

Portland, Ore., over the past five years used money raised for water and sewers to pay for other purposes, including remodeling a building for the nonprofit foundation that runs the city’s Rose Festival, according to a March report by the city auditor.

The project may have helped the public, wrote city auditor LaVonne Griffin-Valade, but state law, city code and bond covenants require that utility ratepayer money be spent for utilities. Misusing the funds could reclassify the money as an unauthorized tax.

A Portland city council member who oversees sewers, Dan Saltzman, said the council “has been getting more lax about how we’re allowing ratepayer dollars to be spent.” He has proposed an independent utility commission.

The result?

A municipal borrower that misleads investors in borrowing documents or uses money raised for other purposes could violate antifraud provisions. Municipalities deemed at higher risk of default typically pay higher interest rates on bonds. By obscuring financial problems, they may underpay bondholders.

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