Creative borrowing catches up with California cities

Oxnard was in a bind, facing a $150-million bill to fix cracking and crumbling streets and no way to pay for the work without cutting other services.

The city had tried, and failed, to get voters to approve a bond measure for street repair. And it had borrowed money against almost all of its public property, including a soccer stadium, three fire stations and its library -- even the Police Department's evidence-storage building.

With virtually nothing left to hock, the city came up with an ingenious way to take on more debt: It borrowed against future revenue by "selling" its streets to a city-controlled financing authority.

"We had way too much construction work to do and way too little money," said Ken Ortega, Oxnard's public works director. "We really pulled every creative financing string we could to come up with the money."

Desperate for cash in a sputtering economy, local governments throughout California are digging themselves deeper into debt, and many are doing so through exotic financing schemes designed to sidestep the need for voter approval.

California cities, counties and other agencies borrowed $54 billion last year, nearly twice as much as in 2000, and governments are straining under the load.

Statewide, 24 cities and public agencies missed scheduled debt payments this year or were forced to tap reserves or credit lines to stay current, records show. That's up from nine in 2006, according to the bond industry's self-regulatory agency.

The city of Vallejo, burdened with huge debt obligations, in May became the largest city in California history to file for bankruptcy protection. Chula Vista, Orange County and Palmdale are among the other cities and counties staring at red ink.

Much of this borrowing binge was made possible by complex financial schemes such as the one Oxnard used. These nontraditional debt vehicles cost more over the long run because they are considered riskier than general-obligation bonds, which governments stand fully behind. Investors therefore demand higher interest rates.

"There are many cities and counties engaging in complex financial deals that they don't really understand," said Michael Greenberger, former head of the trading division of the Commodity Futures Trading Commission. "And now it's starting to catch up with them."