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San Diego Sets April Goal for $650M Sale

SAN FRANCISCO — San Diego would like to issue up to $650 million of water revenue bonds as soon as April. But first the city, which has not been able to access public debt markets since 2003, must obtain one more certified financial statement. Before then, it expects to tap the private placement market at least twice more. Mayor Jerry Sanders set the April goal last week, adding that the key to San Diego’s return to the market is its comprehensive annual financial report for fiscal 2006. He said the city hopes to complete it by the end of January. The city has been blocked from public debt markets since its CAFR for fiscal 2003 became entangled in the crisis that developed after San Diego revealed in early 2004 that it had not disclosed to bond investors the extent of the underfunding of its employee pension plan. The spiraling troubles that followed led to Securities and Exchange Commission sanctions against the city, and as-yet-unresolved federal and state criminal indictments against several former city employees. The delay in obtaining certified CAFRs was the main roadblock between San Diego and public debt markets. The audited financials for fiscal 2003 weren’t completed until March 2007. The 2005 CAFR was completed at the end of October. Since the city’s last bond issue in 2003, it has used private placements to borrow money. Earlier this year, Sanders predicted that the 2005 CAFR would be the milestone that restored market access. But he said last week that Standard & Poor’s is asking for the 2006 financials before it considers reinstating a credit rating for San Diego. The agency suspended its rating in 2004, citing a lack of audited financial statements. San Diego retains underlying credit ratings from the two other major rating agencies, though they are much diminished from pre-crisis levels. Fitch Ratings, which had rated San Diego AAA, now rates it BBB-plus. Moody’s Investors Service rates it A3, down from Aa1 before the crisis. The ongoing delays mean San Diego will turn to the private placement or loan markets at least twice more, Sanders said. In January, the city plans to secure about $120 million of short-term financing for critical water system improvements, he said. San Diego is also “exploring a short-term financing strategy” for deferred infrastructure spending, Sanders said in a letter to the City Council. That $120 million financing would be used for infrastructure projects such as roof repairs, heating and cooling system upgrades, structural repairs, and storm drain, street, and sidewalk improvements. Both interim financings will be taken out with bonds when the city regains market access, Sanders said. The first bond priority will be a water revenue bond issue, as soon as April, of up to $650 million. The water bond plan includes $175 million of new money, $177 million to repay short-term debt, including the forthcoming $120 million borrowing, and up to $300 million to refund outstanding water bonds, assuming the interest rate environment remains favorable. Once the city regains market access, it expects to issue about $700 million to $800 million of wastewater revenue bonds by the end of 2008, and about $380 million of bonds for city infrastructure maintenance by 2012. in his letter, Sanders emphasized that the plan is based on the 2006 CAFR being completed by January, something that is far from certain. He blamed the elected city attorney, Michael Aguirre, for delaying the 2005 audit by eight weeks. “Delays associated with the release of the 2006 CAFR will impede our access to the public credit markets, thereby costing taxpayers more money, and have a negative impact on our ability to provide critical improvements to our basic infrastructure,” the mayor said. Aguirre told a local news outlet that he would work with the mayor’s office, but wouldn’t be driven by a “political timetable.” Both the mayor and city attorney are up for re-election in June.

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