LOS ANGELES — Montebello, a Los Angeles-area city that has been the subject of multiple investigations and audits, issued $2.5 million of tax and revenue anticipation notes at a 4.85% interest rate Thursday.
The private sale to OppenheimerFunds came just a few weeks before the city would run out of cash. Montebello will pay $74,434 in interest on the notes that come due on June 30, 2012.
The Bond Buyer one-year note index stood at 0.30% Nov. 9.
"Our goal was to try to keep it in the 4% range and we got there — especially given the consistent headline coverage of Montebello," said Larry Kosmont, president of Kosmont Cos., a real estate and public finance consulting firm, and the city's interim chief administrative officer.
The subject of investigations by the Los Angeles County district attorney's office and the federal government, the city of 62,500 has undergone eight audits since Kosmont and a team of financial advisors were hired this summer to put Montebello on a sound fiscal track.
So far the investigations have not uncovered actual corruption, but have found issues of financial mismanagement and a failure to adhere to accounting principles, Kosmont said.
When Kosmont was hired in June, the city decided to shoot for a September sale of $3.9 million of notes through De La Rosa & Co. Officials turned to budget cutbacks to reduce the expected cash-flow shortage to $1.3 million from $1.9 million and reduce the amount of borrowing to $2.5 million, Kosmont said.
Kosmont's contract was due to expire on Friday, but he will stay on through December while the city continues its search for a permanent city administrative officer.
California cities receive property taxes in December and April, so it isn't uncommon for them to issue short-term notes toward the end of the calendar year, according to Kevork Khrimian, a Moody's Investors Service analyst.
Moody's gave the short-term notes a MIG-2 rating, its second highest short-term rating, on Oct. 21, and removed the negative outlook it had placed on the city's issuer credit rating in May, when it downgraded Montebello to Baa2 from A3. Moody's also downgraded $14.5 million of certificates of participation to a speculative-grade Ba1 from Baa2.
Montebello received the MIG-2 because analysts felt the city had demonstrated the ability to repay the notes, and the risk on such a small issuance for a city with a $50 million budget was minimal, Khrimian said.
The city originally planned to issue the notes in late September, but reports by the state controller's office impeded efforts to get short-term financing, Kosmont said.
Controller John Chiang's office released two audits in September saying the city mismanaged $31 million in spending, loans, and fund transfers and misspent $3.5 million of bond proceeds.
Kosmont said $30 million of the amount included in the audit is related to redevelopment spending and gas taxes, not money from the city's general fund. Moody's analysts agreed that issues related to the general fund in the audit were minimal, which contributed to the decision to remove the negative outlook, Khrimian said.
In its latest audit, issued on Nov. 3, the controller's office found the city has been outsourcing all of its engineering work to a single company without competitive bidding. Kosmont said the audit did not affect the note sale.
When Moody's downgraded the city in May, expenditures significantly outweighed revenues, but officials have significantly reduced expenditures to put the budget back in line, according to Khrimian.
However, Moody's plans to closely track Montebello's ongoing efforts, he said.
"It appears that their budget is in balance, but they are only midway through the year," he said. "It is one thing to adopt a budget and another to see it through."
