Industry, Calif. Gets Negative Outlook

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LOS ANGELES — Industry, Calif.'s bonds were assigned a negative outlook by Moody's Investors Service ahead of a planned bond sale.

Moody's assigned an A1 rating to the $34.4 million in Series 2017 taxable senior sales tax revenue refunding bonds the city plans to price on April 5.

The rating action "incorporated the city's incomplete progress in addressing concerns regarding poor financial reporting and controls raised in a 2016 State Controller's report and independent reviews undertaken by an outside consultant."

Moody's also affirmed the city's Aa2 general obligation bond rating on $94 million in outstanding obligations and affirmed an A1 rating on $368 million in outstanding senior sales tax revenue bonds.

State Controller Betty Yee's January 2016 audit found the city had almost no financial controls, putting the city at risk for fraud and corruption. City leaders told The Bond Buyer in February, however, that they have implemented 90% of the reforms identified in Yee's audit.

Former Treasurer Bill Lockyer, now an attorney at Orange County, Calif. law firm Brown Rudnick LLP, was hired last year as a compliance monitor on reforms.

The industrial suburb 22 miles from downtown Los Angeles has only 206 residents, but 80,000 people are employed by the city's 3,105 businesses, according to a 2015 report from the U.S. Census Bureau.

S&P Global Ratings withdrew its ratings on Industry's bonds last year in two steps culminating on Oct. 25 with the withdrawal of ratings on the city's outstanding sales tax and tax increment bonds.

S&P analysts cited a lack of information of satisfactory quality to maintain the ratings adding that they believe it will take several years for the city to sufficiently demonstrate a strong capacity for "planning, monitoring, and management," in an Aug. 12 report. S&P pointed to a comment in Lockyer's first progress report that said it would take several election cycles to demonstrate the changes will stick.

The city's large and growing commercial tax base, outsized reserve and liquidity levels, limited operational responsibilities as a largely industrial city, and elevated, but manageable debt levels were cited by Moody's.

The city's creation of a "lock box" structure with direct payments from the state to the bond trustee was deemed "critical" by Moody's in supporting the A1 rating "given the city's history of weak financial practices."

The creation of a lock box will help the city to avoid the kind of administrative error that occurred in June 2016 when the city repaid $3.05 million of a general fund loan from sales tax receipts, rather than sending the remittance directly to the trustee. Sufficient funds had already been sequestered to make the July 2016 senior lien and August 2016 subordinate lien payments, but the direct payment to the general fund violated the Series 2015 indenture, which requires all sales tax revenues be sent immediately to the trustee, analysts wrote.

The ratings could be downgraded if the city fails to make meaningful and sustained improvements in the professionalization of city operations to ensure disclosure reporting is consistent and transparent, Moody's wrote.

 

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