SAN FRANCISCO — Standard & Poor’s slashed Hercules, Calif.’s revenue bonds five notches on Tuesday, partly as a result of bankruptcy statements by city officials.
The agency cuts to BB from A-minus the ratings on three series of revenue bonds issued by the Hercules Public Financing Authority for the city and placed them on watch for potential downgrade.
Standard & Poor’s analyst Sussan Corson said in a report Tuesday the downgrade resulted from statements by Hercules officials that the city could go bankrupt without $4 million of redevelopment agency tax money that is being contested by Ambac Assurance Corp. in a lawsuit.
Corson said the rating also reflects concerns about the city’s own ability to pay debt service, its practice of pooling cash across funds, its dwindling reserves and cash flow, and a “high overlapping debt burden.”
Standard & Poor’s downgraded the city’s 2010 electric system revenue bonds, its 2009 taxable lease revenue bonds, and lease revenue bonds issued by the authority in 2003.
Ambac filed a lawsuit at the end of January against Hercules after the city’s redevelopment agency defaulted Feb. 1 on a debt service payment.
The agency failed to make a $2.4 million debt service payment at the beginning of the month using its tax revenues, and instead used the insurer’s surety reserve. Ambac has issued surety bonds and insured $56.2 million of tax allocation bonds issued by the city’s RDA in 2005 and $60.5 million of tax allocation bonds issued in 2007.
Ambac alleges in the lawsuit, filed in Contra Costa County Superior Court, that the redevelopment agency illegally transferred tax money to the city instead of using it to pay bondholders.
The city said it had loaned the money to the RDA for earlier debt service payments and the most recent tax revenues were used to pay the city back.
Hercules said in a disclosure filing that if it loses the lawsuit, it could be forced to file for Chapter 9 bankruptcy.
Last week, Ambac filed a preliminary injunction to freeze $4.1 million of city funds, which it claims is the amount of tax revenue owed to the trustee, or in lieu, a claim on city property for the amount. The court denied the insurer’s requests and set a hearing for Feb. 12 on the injunction.
The default prompted Standard & Poor’s to downgrade the underlying rating on the tax allocation bonds further into junk territory, to CC from CCC on Feb. 2.
The redevelopment agency and the Public Financing Authority have more than $162 million of outstanding debt. That does not include debt associated with assessment districts.
Hercules, which has a population of 26,000, sits on the northeast shore of San Francisco Bay, a few miles south of Vallejo, which itself exited bankruptcy earlier this month.
The issue is complicated by recent California legislation that forced redevelopment agencies to shut down at the start of the month. Obligations between cities and their RDAs, such as loans or transfers, made since the beginning of last year could be voided because of the legislation.
Hercules officials have said they are concerned they will lose money owed to them by the redevelopment agency, which has been run by the City Council.
Contracts between redevelopment agencies and third parties, such as bondholders, are expected to be protected during the process of transferring the responsibility for obligations.
The lawsuit is just the latest in a long string of troubles related to the city’s finances.
In August, state Controller John Chiang ordered an investigation into the city, saying his office found major problems with its finances. The investigation is still ongoing.
Earlier in 2011, the Contra Costa County grand jury said in a report that the city has used bond funding to make up a $6.6 million deficit. In 2010, the same grand jury described the appearance of impropriety and-or lack of transparency in the city housing and business loan program.
