LOS ANGELES — Hercules, Calif. closed on a tender offer Thursday, avoiding potential bond defaults and sealing the sale of its city owned utility to investor-owned Pacific Gas & Electric.
City officials had warned in tender offer documents that if the tender offer failed to draw enough buyers it could default on its electric system revenue bonds.
The city agreed to retire the bonds as part of a $9.5 million deal struck with PG&E in May 2013 to buy the Hercules Municipal Utility.
"This has been a long process," Hercules Mayor John Delgado said during the city's April 9 council meeting broadcast on its website. "In 2010, my first year in office, the finance committee recommended we sell it. I can't believe it is finally here."
Hercules, located northeast of San Francisco with a population of around 26,000, has experienced a host of financial problems, including allegations of misuse of bond money and poor record keeping.
The bond documents stipulated that the general fund be used to cover shortfalls in bond documents. The city had warned in tender offer documents that by August the bond proceeds would have been exhausted and the city would have to default on the bonds or face insolvency.
At the same meeting, council members discussed whether the city should have direct oversight of the finance director.
Nickie Mastay, named financial director in Feb. 2012 after serving nearly a year in an interim capacity, inherited the city's fiscal woes.
The city utility began providing electric service to residents in 2003, but never made a profit, according to a letter Phil Batchelor, city manager, sent to bondholders.
The offer was launched on March 5 for $13 million par of revenue bonds issued in two series in 2010 that were used to fund improvements to the city owned and operated utility. The city offered to purchase the bonds for 90% of par value.
Standard & Poor's, the only agency to rate the bonds, suspended the city's CCC-plus rating on June 28, 2013 citing a lack of financial documents for fiscal 2011.
The city, which has struggled financially, turned a corner last summer after more than 70% of city voters approved a measure to increase the city's utility tax two percentage points to 8% for five years, and expand it to include cable television. The tax increase adds $1 million annually to city coffers and helped close a $1.27 million structural deficit in the city's general fund.
Last year's tax increase came on top of half-cent sales tax increase approved in June 2012 that expires in 2016 and brings in $500,000 in annual revenue.
