Crisis likely won't hamper borrowing for region's cities

In spite of the recent failures of financial institutions and more stringent restrictions being placed on credit in the private sector, the region's cities should have no problem borrowing money at low interest rates, a financial expert has told the Norfolk City Council.

Investors are seeking out government bonds, JoAnne Carter, managing director of The PFM Group, a financial management company from Arlington, said during a recent hourlong presentation to the council.

"You will be able to obtain the money you need because investors understand" that investing in government bonds is less risky than other investments, she said.

That's in part because of the meltdown of the credit industry, which is awash in bad debt. Investors are eager to purchase debt guaranteed by taxpayers.

But it is also because several ratings agencies, including Moody's Investors Service, were sued by the state of Connecticut for discriminating against government bonds.

Connecticut officials alleged that corporate bonds default more often than bonds for public agencies, yet the corporate bonds usually have higher ratings from the agencies, and thus enjoyed lower interest rates from the market.

Lower ratings for government bonds translated into higher interest rates for government borrowing; thus, the ratings agencies unlawfully cost taxpayers hundreds of millions of dollars, the lawsuit alleged.

As a result, Moody's and other ratings agencies are recalculating their ratings for cities.

All regional cities have good or outstanding credit ratings, Carter said. Virginia Beach - which is rated Triple A by Standard & Poor's, for example - has the highest. Carter said those ratings should improve in the coming months.

Norfolk Mayor Paul Fraim said he can't recall the last time a city defaulted on bonds. "You can't say that about other investments," he said.

Norfolk recently sold $153.5 million in 20-year, tax-free general obligation bonds, purchased by Citigroup Global Markets at 4.44 percent interest.

"The market understands municipal borrowing," Carter said. "They know you're building schools, libraries and other facilities and understand how government works."

They also understand, she said, that local cities keep a watchful eye on their bottom lines.

All cities have different measures for how much debt they can issue. By one measure, Suffolk and Chesapeake have borrowed about half of what they could borrow. Virginia Beach is $100 million under its debt limit.

Portsmouth is so close to its limit that officials have balked at building a new courthouse.

Next year will be a difficult one in Norfolk, when the city will borrow $40 million for a new courthouse complex alone, in addition to millions more for new schools.

Assistant City Manager Marcus Jones said staying under its borrowing limit will be difficult, "but it's something we have to do."

 Pilot writers Deirdre Fernandes, Mike Saewitz, Jen McCaffery and Dave Forster contributed to this story.

Harry Minium, (757) 446-2371, harry.minium@pilotonline.com