Standard & Poor's Ratings Services said it placed all of its ratings for investment-grade tax increment bonds in California on CreditWatch with negative implications.
"The CreditWatch placement is due primarily to provisions in Assembly Bill 1484, passed on June 27, 2012, which we believe could lead to further confusion and potential cash flow disruptions for some successor agencies," said Standard & Poor's credit analyst Sussan Corson.
Beyond the recent changes as a result of Assembly Bill (AB) 1484, Standard & Poor's observed a modest number of successor agencies--although more than in the past--that have used debt service reserves for cash flow purposes as well as tax revenue disputes between governmental agencies.
Although the law continues to state its intent to honor revenue pledges of enforceable obligations (including bonds) of the former redevelopment agency, these cash flow concerns could cause some successor agencies, even those with tax increment bonds exhibiting good debt service coverage, to draw on debt service reserves for timely payment of debt service in the short term.
AB 1484 includes provisions that reduce property tax revenue to successor agencies, which could cause shortfalls in cash available for debt service.
In particular, certain provisions of AB 1484 could reduce property tax distributions to successor agencies to retroactively recapture surplus property tax distributions that previously had been distributed to successor agencies rather than to taxing entities between January to June 2012.
The provisions require the county auditor-controller to calculate what would have been owed to these taxing entities using the California Department of Finance's approved recognized obligation payment schedules (ROPS) for the period of January to June 2012.
Furthermore, a provision in AB 1484 that reduces property tax revenue to successor agencies by an amount equal to unpaid pass-through payment obligations between January and June 2012 could further exacerbate some successor agencies' ability to manage cash flow.
The state Department of Finance reports that no bond obligations on successor agency ROPS were rejected and the law prioritizes bond payments above nonbond obligations from revenues distributed to the successor agency; however, the provisions in AB 1484 to reduce property tax distributions could lead to cash shortfalls for some successor agencies that have already spent questioned revenue previously received by the counties.
Standard & Poor's expects to request cash flow-specific information from individual successor agencies related to actual property tax distributions, available cash balances, debt service reserves, and debt payment plans to resolve this CreditWatch in the coming months.
Standard & Poor's views sound cash and debt management practices as important rating factors. For successor agencies with documented sound cash flow practices during this period of uncertainty (as well as unchanged long-term credit fundamentals), Standard & Poor's could maintain the rating and revise the outlook to stable.
For tax increment bonds of successor agencies that have cash flow concerns, use debt service reserves, or demonstrate weak cash and debt management, Standard & Poor's could lower the ratings.
Should they fail to receive sufficient timely information from individual successor agencies, Standard & Poor's could withdraw or suspend ratings in accordance with its procedures for withdrawal or suspension. In addition, should further clarification of state law or state Department of Finance guidelines and practices impair pledged revenue, S&P could withdraw its ratings on all of these bonds.
