City audit warns of potential funding problems

Debt, obligations and infrastructure needs could reduce basic services

Although Portland government is currently in good financial shape, its ability to provide basic services in the future is threatened by growing debt, unfunded liabilities and increasing infrastructure costs, according to a city audit released Thursday.

City Auditor LaVonne Griffin-Valade says she will request a City Council work session to discuss the findings and how they could affect future budget decisions.

• Click here to read the city's audit.

'I think this is the most important audit I've done in all my years as an auditor. I want the council to fully understand how the decision they are making will affect the city's future financial capacity,' says Griffin-Valade, who served a Multnomah County Auditor before being elected to the city post in 2009.

Griffin-Valade says the most important finding may be increasing percent of property tax revenues being spent on urban renewal. The audit found that between 2001 and 2010, property taxes spent to pay for urban renewal debt increased from 16 cents to 24 cents per dollar.

'That's a big piece of the pie,' Griffin-Valade says.

The audit is titled 'Portland's Fiscal Sustainability and Financial Condition: Actions now can reduce risk of future problems.' It said the city's financial condition is currently stable, in part because of a diverse revenue base and strong policies that help in multiyear financial planning.

But the audit identified a number of trends that could reduce the money available for basic services in the future. They include a growing amount of debt payments authorized by the council, future pension and other post-employment obligations to city workers, and increasing unfunded infrastructure maintenance and capacity costs.

The audit recommended the council develop a funding strategy to reduce unmet budget needs for infrastructure maintenance and to take care of current assets before adding new ones. It also recommended that the Office of Management and Finance develop and monitor measures of citywide debt and report the information annually to the council. And OMF was urged to consider options for reducing pension and other post-employment liabilities.

Among other things, the audit found:

• Total city revenue is up 26 percent from $1.1 billion in 2001 to $1.3 billion in 2010. Portland's population has grown 10 percent during this time. Total revenue per resident increased 15 percent during the ten years, from $1,986 to $2,292. Total property taxes going to the city grew by 41 percent, from $300 million in 2001 to $424 million in 2010.

• City spending per resident increased 16 percent, from $2,258 in the 2002 fiscal year to $2,621in 2010 fiscal year. Total expenditures increased steadily from $1.21 billion to $1.53 billion, a 26 percent increase.

• Although total city employment grew in 10 years, the number of employees per 1,000 residents remained relatively constant. The number of city employees grew from 5,386 in the 2001 fiscal year to 5,592 in 2010 fiscal year, a four percent increase. The number of employees per Portland resident remained at about 10 employees per 1,000 residents during the same time period.

• The percent of property taxes going to the discretionary general fund shrunk from 56 percent in 2001 to 46 percent in 2010. The other largest commitment, the amount going to the Fire and Police Disability and Retirement Fund, remained at 25 percent. During that time, the percent going to pay urban renewal debt grew from 16 percent to 24 percent.

• The city's net assets have decreased steadily since 2002. Net assets measure the difference between what the government owns (assets) minus what it owes (liabilities

It indicates how much the City's financial position has improved or worsened as a result of events and transactions made during the year. The city's total net assets declined 16 percent from 2002 fiscal year to the 2010 fiscal year, from $3.2 billion to $2.6 billion, unadjusted for inflation.

• The city's outstanding debt increased 34 percent from 2001 to 2010, from $2.3 billion to $3 billion. In 2010, the total outstanding debt per resident was $5,185. This is an increase of 22 percent from 2001 levels. Fifty-five percent of the City's debt is from revenue bonds. These grew 50 percent from 2001 to 2010, from $1.1 billion to $1.6 billion. Almost all of the revenue debt is for sewage disposal bonds and water bonds. The remainder is related to the gas tax, golf, hydroelectric power, and parking facilities. Urban renewal debt, including bonded debt and lines of credit, increased 88 percent from 2001 to 2010, from $280 million to $526 million.

• The pay-as-you-go Fire and Police Disability Fund represents a large an growing risk to property taxpayers. As of June 30, 2010, the unfunded liability was estimated at $2.5 billion. Total annual costs are estimated to increase from $111 million in 2010 to $280 million in 2029, not adjusted for inflation. Taxpayers will see their property tax payments for FPDR increase about 35 percent over the next five years.

• Unfunded infrastructure needs are large and growing. According to the 2010 Citywide Assets Report, there is already a $312 million funding gap between the 2011 fiscal year budget and what bureaus identified as necessary to maintain existing facilities, develop needed capacity, address regulatory requirements and meet service levels. The Portland Bureau of Transportation has the largest funding gap, with the bureau identifying $177 million in need beyond what is budgeted.

'Improving the city's financial position will involve difficult decisions, but Council must act soon to ensure an undue burden is not placed on future generations,' Griffin-Valade wrote in the audit. 'Many of the trends we have identified will require thoughtful deliberation and perhaps fundamental shifts in how the City does business.'

In a response, Mayor Sam Adams thanked Griffin-Valade for the audit and said it was fortunate the city has taken strong and consistent steps to deal with many of the funding challenges. Adams also said it was important to improve the economy and make it more resilient.