Milwaukie council debates state loan program amid lingering liability and capacity questions

Milwaukie councilors and city staff spent the meeting dissecting a state-sponsored loan program presented in the staff report (referred to in meeting materials as the Merle loan program), but took no formal action. Joseph, assistant city manager, and development staff reviewed how other Oregon cities have approached the program and outlined risks for a small city acting as the program’s sponsoring jurisdiction.

The discussion centered on three policy questions: who administers and monitors compliance, how the city would handle defaults and whether the state would provide underwriting or contingency support. “The state gave a fairly lawyerly answer — they wouldn’t say ‘the city won’t owe the money,’” Joseph said, describing recent conversations with OH(S/C)S and other jurisdictions.

Why it matters: the loan program can leverage larger pools of capital than Milwaukie’s existing CET (city) funds, but it also creates potentially long‑running contingent obligations. Councilors pressed staff for concrete answers about whether a default — for example, a project foreclosure during or after construction — would hurt the city’s credit rating. A councilor summed up the question directly: “If we default due to somebody going into foreclosure, how does that affect the city’s credit rate?” Staff said the state offered only general assurances that it would work with cities and county assessors to cure late payments; it did not provide a definitive promise to absorb or indemnify local liability.

Staff laid out how other cities have tried to limit risk. Hood River and some others limit awards to nonprofit developers, stage disbursements to milestone completions, and build compliance monitoring into contracts with third‑party nonprofits. That approach can shift the day‑to‑day monitoring responsibility away from a small city office, but councilors noted it adds layers of contract management and does not eliminate long‑term exposure.

The council also examined numerical scale and possible mitigations. Staff offered a sample calculation showing that, for a hypothetical 44‑unit project, a small number of foreclosures at a 5% default rate could translate to a few thousand dollars a year in lost tax increment revenue — a manageable sum on paper — but several members warned that the reputational and credit consequences of even a single default could be larger and were not yet clear. Joseph and other staff suggested structuring loans as tranche disbursements and holding contingency reserves (for example, a targeted CET reserve) timed to peak exposure during the largest drawdown of state funds.

Members pressed whether Clackamas County could serve as the sponsoring jurisdiction to gain scale and consistent administration. Staff reported that the state told them the county cannot act as the sponsoring jurisdiction under current guidance, although if the county later adopts a role the county might provide assistance. That left cities responsible for coordinating with the county tax assessor for verification and collections — a local administrative burden the council flagged as potentially onerous.

On the tradeoff between local CET grants and the state loan, staff said the Merle program’s advantage is leverage: a relatively small local reserve can unlock larger state dollars. The tradeoff is higher administrative complexity and long‑term contingent liability. “Merle opens up more doors, but it adds significant administrative burden, risk and capacity demands that I don’t believe we really have,” one staff member told the council.

After extended discussion, staff framed two realistic near‑term paths: 1) pursue CET‑driven local strategies matched to Milwaukie’s existing administrative capacity; or 2) if the council wants to pursue the state loan, direct staff to return with a detailed implementation plan, potential contracts with nonprofit compliance partners, and clearer answers from the county and the state about underwriting and credit‑rating implications. Staff requested guidance on whether to place a Merle program action on the June 2 council agenda after the county meets the same issue.

Councilors also discussed drafting a short regional letter to Clackamas County asking the county to consider contracting capacity or a contingency fund to assist smaller cities implementing the program. Staff offered to circulate a concise draft for regional review and suggested omitting language that would precommit cities to administrative fees or specific county divisions without further consultation.

The session closed with routine council reports and a motion to adjourn, which carried by voice vote. The council did not adopt the program or vote to sponsor it; staff will return with more information if the council requests a formal agenda item after county review.