I can personally attest to Portland having plenty of cheap cocaine around, at least. I can't personally attest to anything about heroin.
It is true about the city being generally permissive of panhandling and vagrancy. The city has even let homeless people build their own village-ish settlement on unused municipally-owned land. The difference is that panhandlers are generally not as aggressive as what I witnessed in Cincinnati- if you simply decisively decline (or, even better, just wear your iPod), the vast majority of them will not hassle you beyond the initial request. I lived in the middle of downtown for eight months and had no major problems.
There was a book
written fairly recently by a woman who ran with some street gangs (which here are mostly white kids from working-class or middle-class families, not black kids). I haven't read it- just an article about it in the newspaper- but I intend to soon.
If I could speculate myself on why Portland has gotten this way, I'd say it was because the city is generally "working-class" but without much of the manufacturing base that you typically see in the Midwestern cities. The city has also generally been relatively hard on larger business with regards to taxes and zoning. So, you have higher unemployment and fewer decent jobs that don't require a college education. To compensate, there are more small independent businesses and the like... but as you know, not just anyone can pull off the complex mix of skills needed to be successful in small business.
I freely admit that I've lived here less than two years and could certainly be proven wrong, but these are some of the theories that have taken shape for me.