SAN FRANCISCO — The Sierra Kings Health District in Reedley, Calif., last week filed for Chapter 9 municipal bankruptcy protection after discovering that the proceeds of bond sales in 2006 and 2007 were misused.

The hospital district has been losing money since at least 2006, according to its financial statements. With mounting losses, hospital management spent $1.7 million of bond funds on operating expenses, beginning in June 2008, the district said in a material event notice filed on the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system early last week.

“The debtor is insolvent,” district attorney Riley C. Walter, of the Walter & Wilhelm Law Group, said in a bankruptcy petition filed with the U.S. Bankruptcy Court for the Eastern District of California on Thursday.

The bare-bones filing lacked a full disclosure of the hospital district’s debts or an explanation of its financial woes. The Fresno Bee reported that the rural public hospital district owes $3 million to vendors and plans to continue to operate while it reorganizes. 

The district said in its material event notice that it had fired or placed on leave the executives who misused bond proceeds. Interim chief executive officer Sanford Haskins did not return calls seeking comment by press time Friday.

Sierra Kings sold investment-grade debt as recently as August, when it issued $4 million of property tax-backed general obligation bonds. Moody’s Investors Service this week downgraded the debt to Ba2 from Baa3 Thursday and placed the debt on watch list for possible downgrade after the district’s board voted to declare bankruptcy.

Moody’s, which is the only agency that rates the debt, cut the district’s ratings to Baa3 from Baa1 ahead of the August bond issue. The action affects about $20 million of rated GOs.

The hospital has another $12.4 million of muni bonds outstanding, including $5.7 million of insured GOs sold in 2002 and $7.1 million of unrated revenue bonds sold in 2006.

“This rating action reflects the district’s imminent filing of a petition for Chapter 9 bankruptcy protection,” Moody’s analyst Michael Wertz said in a report. “While continued district operations are not necessary for general obligation bond debt service to be levied, collected, and paid, it does raise the specter of a possible temporary disruption of debt service payments.”

Wertz said the district so far has made its debt-service payments on the rated debt as scheduled. Its next payment is due Feb. 1, 2010.

“The district’s financial operations have also been severely disrupted by the termination of the district’s CFO and the placement of its CEO on unpaid leave of absence,” he said. “The positions are now held on an interim basis by personnel under contract with the district.”

The district is located about 30 miles southeast of Fresno. Its main asset is the 44-bed Sierra Kings District Hospital in the town of Reedley.

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