Standard & Poor’s this week slashed its rating on the Palmdale Water District’s revenue certificates of participation to BBB from A on a sharp decline in revenues and a legal challenge to recent rate increases.
The downgrade affects about $36.7 million of COPs sold in 2004 with credit enhancement from Financial Guaranty Insurance Co. to finance construction of a water treatment facility. Standard & Poor’s also placed the debt on negative CreditWatch.
“The downgrade reflects our view of a seriously weakened financial and liquidity position, due largely to deteriorating economic performance of the service area,” analyst Ian Carroll wrote in a report. He said the district is suffering “a dramatic real estate correction, including high foreclosures and population loss.”
The Palmdale Water District includes the city of Palmdale in northeastern Los Angeles County. The region saw rapid development during the housing boom, but the water district’s revenues have been sharply reduced by a slowdown in connection fees.
The district had to tap its rate stabilization reserves to pay debt service last year and plans to deplete the reserves to meet debt service payments this year, Standard & Poor’s said. In May, the district enacted a rate increase that would triple some customers’ bills over three years.
But the city of Palmdale, population 150,000, has sued to block the rate hike, saying the district did not properly follow California laws that govern governmental tax and fee increases.
The local newspaper, the Antelope Valley Press, has reported that the district may run out of cash and be forced to declare bankruptcy by August if it cannot cut its operating expenses and maintain the rate increase, citing internal memos.
District general manager Randy Hill said he’s doing everything he can to prevent that and expects the court to rule in the district’s favor, allowing the rate increase to go into effect.
He said the city’s opposition to the rate hike has complicated the district’s finances. The district drew down reserves to pay for completion of the water treatment facility and planned to issue about $18 million of bonds this summer to reimburse itself for construction costs, but after the city’s rate challenge, the district will be unable to sell new debt and replenish its reserves.
Hill said the Water District has canceled existing contracts, laid off workers, and instituted mandatory, unpaid furloughs to reduce its operating budget and prepare for a $2.3 million debt service payment due in October.
“My commitment is that we are going to make the October and April debt payments, no matter what it takes,” he said.
A court hearing is expected next month on Palmdale’s request for an injunction to block the rate increase. If the rate hike is upheld, the Water District will be able pay its debt service even without issuing new debt, according to Hill.
While the city expects to draw down its rate stabilization fund for the October payment, it does not plan to dip into its debt service reserve fund, he said.
Hill admits that his plans could be upended if a judge rejects the rate increases, but he says the district isn’t going to declare bankruptcy.
“We have taken every measure possible to make sure that that doesn’t happen,” he said. “I’m not worried as much about bankruptcy because, obviously, I’m managing here and I’m not going to let that happen.”
